Flash Notes

Indonesia’s tax amnesty bill was approved by the parliament to be set into law today. Under the tax amnesty bill, declared and repatriatedwealth will be taxed at 2-5% while those declared but not repatriated will be charged 4-10%. Companies with gross income up to Rp4.8bn in the latest tax year will only pay 0.5% redemption rate for up to Rp10 bn of assets declared and 2% for those reporting morethan Rp10 bn. The parliament also approved revisions to the 2016 state budget which has assumed US$12.4 bn (1.4% of GDP) inadditional revenue from the tax amnesty programme that will run for 9 months until end-March 2017. This is much higher than BankIndonesia’s estimate of US$4 bn (0.5% of GDP) in additional revenue. Diesel subsidy will be cut from Rp1,000/litre to Rp500/litrestarting from July 1 in line with the government’s subsidy rationalization.

    The revised budget deficit for 2016 is at 2.35% of GDP compared to 2.15% in the original budget while earlier concern was that thedeficit could rise beyond 3.0% as a result of the revenue shortfall. The government estimates that the new law will boost GDP growthby 0.3% point in 2016. In the short-term, we expect to see a pick-up in consumer spending after the clarity on the tax amnesty aschecks by the tax authority on tax evaders had suppressed spending on big-ticket items earlier this year. We are keeping our 2016GDP growth forecast for Indonesia at 5.0% for now as we assess the global fallout from Brexit.

    USD/IDR fell as much as 1.3% to a low of 13,160 today while Jakarta CI surged around 1.0% as the tax amnesty bill was passedinto law. Since the move was already within market’s expectation, further impact on the financial market is likely to be contained andespecially given the uncertainties in the global financial markets following Brexit. We are retaining our forecast for USD/IDR at 13,200by end-3Q16. The repatriations of wealth related to the tax amnesty programme will need to be invested onshore for 3 years and arelikely to support the IDR but authorities will seek to minimize currency volatility. Further monetary easing and wider current accountdeficit could potentially weigh on IDR. There remains risk that the central bank will cut interest rates by a further 25 bps in 3Q16.