OREANDA-NEWS. Indonesia Seeks to Revitalise Growth

President Joko Widodo has pushed for a cut in the country's corporate tax rate to keep companies from shifting operations into countries with lower tax rates. The corporate tax rate will likely be reduced from the current 25% to about 17.8% or 17.5%.

The move is part of Widodo's efforts to discourage companies from squirrelling profits into overseas tax havens, as he focuses on boosting state coffers to fund the nation’s infrastructure development and achieve growth of 7%. A decline in government spending contributed to a further slowing in Southeast Asia’s biggest economy last quarter, and Indonesia’s tax collection has also fallen behind the curve.

The government also plans to allow foreign investment in apartments to boost tax revenue, a move that could spur demand for property in the country’s luxury market. Finance Minister Bambang Brodjonegoro recently said his government will let foreigners own luxury apartments priced at more than IDR5 billion (US\$380,000). Indonesia’s property market, particularly the premium high-rise category, could see renewed interest if this plan gets the green light.

In the first quarter, the economy grew 4.7% year-on-year, below the 4.9% consensus forecast, and at the slowest pace since the 2009 Global Financial Crisis. On a quarter-on-quarter basis, gross domestic product (GDP) contracted 0.18%.

Cement consumption, an indicator of economic activity, fell to 4.3 million tonnes in March. 

Analysts believe investors are scaling back their expectations on how much President Widodo can achieve in the short run.

The MSCI Indonesia Index recently bounced off its 10-day moving average. On the whole, the index has largely held above its 30-day and 10-day moving averages over the past year. What remains to be seen is whether the index can sustain its upward trend when the Federal Reserve increases interest rates.

Higher Tax Collection Goal

The country aims for a 30% increase in its tax collection this year, which may be an ambitious goal, since only 900,000 out of a population of 255 million actually pay income tax.

Since 2011, Indonesia has been implementing a national biometric identification card program, replacing all previous identity cards with just one for all programmes, including voter registration, passports and taxes. Previously, Indonesians used only one name, creating potential hurdles for identification.

The country is also introducing a tax amnesty this month to boost revenues, Finance Minister Bambang Brodjonegoro revealed in an interview. The amnesty will last until year-end and allows citizens to avoid penalties if they pay five years of unpaid taxes.

El Nino could Impact Palm Oil Output

The return of El Nino for the first time since 2010 was declared on 12 May by Australia’s Bureau of Meteorology.

Oil palm prices could rally if this weather pattern materialises as output may slump amid dry conditions.

“In the coming months, we expect palm oil export figures to pick up as end-buyers like China, with its low inventory level, may take a defensive strategy to stock up ahead, on fear of a possible supply crunch,” Maybank Investment Bank analyst Ong Chee Ting wrote in a report.

Lower oil palm production in the long run could also hurt Indonesia’s tax collection. A US\$50 (per metric ton) levy on crude palm oil exports and a US\$30 (per metric ton) levy on processed palm oil product exports are slated to be implemented in late May. Proceeds from these export levies will be used to fund the government’s biodiesel (subsidy) programme.

SGX MSCI Indonesia IndexSM Futures

Trading in SGX MSCI Indonesia futures contracts jumped 11.7% month-on-month in April to a daily average volume of US\$13.4 million, the highest daily average number of contracts traded so far this year.

As the only offshore listed futures contract based on the Indonesian equity market, the USD-denominated SGX MSCI Indonesia futures contract is an effective hedging and access tool for customers to invest in the country’s growth without the risk of currency fluctuations. Investors who wish to maintain their Indonesian holdings may choose to short equity index futures to take advantage of short-term volatility without unwinding their stock portfolio.

The futures contract provides an alternative and complementary tool to Indonesia ETFs. In comparison to the top three global ETFs by size that track Indonesia ETFs, the SGX futures contract has around 40% volume market share and 10% open interest market share.