Indonesia To Launch Foreign Investor Focused Stimulus Package

Monday, November 19th, 2018 | 904 Views


Indonesia is looking to launch an economic stimulus package that will promote the rupiah and thus, lead to domestic growth. This announcement comes ahead of the 2019 presidential election and is an acknowledgement of the country’s need for economic development. Opposition leader Prabowo Subianto has also announced that he will reduce corporate and personal income taxes in order to attract more investments if he wins the upcoming elections.

The impending stimulus package announced by the government include tax cuts from 2019 onwards for exporters of commodities in the mining, plantation, forestry and fishery sectors who are able to retain their export revenues in the domestic banking system. It will also include a tax holiday for two industrial sectors – agriculture-based manufacturing and digital industry – and will encompass a relaxation of the country’s Negative Investment List for some priority sectors.

Finance Minister Sri Mulyani has commented that a reduction of income tax will apply to the interest of time-deposits both in local and foreign currencies deriving from export revenues.
However, exporters who do not keep their export earnings domestically may be barred from moving their goods overseas as this would lead to capital outflows and a depreciation of the local currency as witnessed in the 1998 Asian Financial Crisis. A scenario that President Joko “Jokowi” Widodo has reaffirmed to 40 local exporters in July that the country is looking to avoid.

Mr. Satria Sambijantoro, an economist at Bahana Securities, has said that by retaining export revenues within the country, foreign exchange reserves can increase and this will prevent capital outflows from Indonesia in the future. With the change induced by the new stimulus package, foreign ownership in 54 business sectors, including the steel, chemical and petrochemical industries can now be increased to 100 percent, which is a drastic increase from the present 30 to 67 percent ownership allowed. This reflects the 2015 policies that were made to facilitate foreign investments and complements the last stimulus package that was introduced in August last year, which had an aim of increasing foreign investment. Regarding this, Coordinating Economic Minister Darmin Nasution has said, “We cannot address current account [deficit] issue[s] only. That’s important, but not enough. We must formulate policies to give investors confidence and allow capital growth.”

Although, the country is still lagging behind President Joko’s 7 percent growth target, the central bank has projected that the economy will grow by 5.1 percent this year, compared to last year’s 5.07 percent. This follows the government projection in August that the country’s economic growth will be 5.18 percent this year. Currently, Indonesia has been struggling to stabilise its fluctuating currency as well as the loss of confidence amongst investors. Centre of Reform on Economics Indonesia Executive Director, Mohammad Faisal, has said that with the United States intensifying efforts to boost its own economy, including adopting a highly domestically centred monetary stance, capital has been diverted away from emerging economies like Indonesia. He has further commented that, “All emerging markets are affected by shocks from the US, but our currency depreciation is among the deepest.”

Despite an increase in the value of the rupiah since early November, analysts have warned that risks remain on the horizon, especially for imports that traditionally spike during the year-end holidays as depreciations might contribute to a higher current account deficit. A trend that was observed in October when the Statistics Indonesia posted that deficit figures had reached US$1.82 billion which was the country’s second highest deficit figures in 2018 and have led to a weakening of the rupiah.

Last week, the Bank of Indonesia (BI) raised its benchmark rate by 25 basis points for the sixth time this year, to 6 percent. This is aimed at protecting the value of the rupiah in anticipation of a potential fourth hike this year in US rate, which will likely occur in December. BI Governor, Perry Warjiyo, has argued that with interest rate increases, along with instruments to control imports, the current account deficit can be narrowed to 2.5 percent of GDP next year. Although this year, the central bank estimates the gap will remain below three percent.

 

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