Tax amnesty scheme gives Indonesia strong kick-off to 2017

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The first quarter of 2017 saw the Indonesian government’s tax amnesty scheme end successfully, with record amounts of assets declared and tax penalty revenues. Infrastructure spending remains the country’s main growth driver, and we expect corporate earnings to improve as Indonesia continues on the path to economic recovery.

Tax amnesty success

Indonesia’s nine-month tax amnesty ended on 31 March, and was broadly successful. Launched in July 2016, its aim was to improve tax compliance, boost the government’s tax revenues and encourage the repatriation of offshore assets by offering tax incentives and immunity from prosecution.

A total of USD 366 billion – equating to more than one-third of Indonesia’s GDP – was declared and USD 10.2 billion in taxes on those assets were paid. Overall tax revenue collected under the programme represented around 80% of the government’s target (see exhibit 1). The one-off revenues from the amnesty boosted government tax revenues by 3.6% YoY in 2016, helping to fund infrastructure spending and to keep the fiscal deficit to within the statutory limit of 3% of GDP.

A positive spin-off from the programme is a likely wider tax base, which should provide greater room for fiscal manoeuvring and thus bode well for President Jokowi’s infrastructure and inclusive growth initiatives. Longer term, we believe the wider tax base can lift overall liquidity and Indonesia’s tax-to-GDP ratio, resulting in more sustainable budget revenues. In parallel, given the boost to business confidence and the influx of liquidity from repatriation, there is scope for the business climate to improve.

Exhibit 1: The graph shows tax amnesty revenue collection in Indonesia. The government’s target on tax amnesty revenue collection is IDR 165 trillion, amnesty revenues amounted to around 80% of this targetIndonesian government’s tax amnesty

Source: Indonesia Ministry of Finance, Goldman Sachs Global Investment Research, April 2017

More allocation for infrastructure

The government plans to cut unproductive ministerial agency spending by about 40%, or IDR 34 trillion (USD 2.6 billion), and reallocate the savings from this to infrastructure. We see this as solid evidence of the commitment to accelerating infrastructure development.

One-fifth of Indonesia’s budget, amounting to IDR 387 trillion (USD 29 billion), is destined for infrastructure spending in 2017, a 46% YoY increase on realised infrastructure spending in FY 2016. If the additional IDR 34 trillion in savings is achieved, the total infrastructure development budget will rise to IDR 421 trillion (USD 32 billion), equivalent to 3% of GDP.

Initial projects include expanding the country’s power generation by 35 000 megawatts and building an uninterrupted toll road connecting several cities to the so-called sea toll road programme.

Further macroeconomic improvement

Indonesia’s fundamentals remain robust, with macroeconomic data pointing to continued improvement.

The government forecasts Q1 2017 GDP growth to remain in line with Q4 2016, at 4.9% YoY, given softer household consumption but stronger investment and exports. It expects growth to accelerate in Q2 2017. The manufacturing PMI rebounded to 50.5 in March from February’s 49.3.

The trade surplus remains stable. Led by rising commodity prices, exports continued to outpace imports during Q1 2017.

Inflation remains benign. At 3.6% YoY, the consumer price index remains near the lower end of Bank Indonesia’s 3%-5% target range.

Indonesia’s reduced vulnerability to financial shocks means we do not see any major risk of a de-rating in price-to-earnings terms given the stable current account deficit, real interest rates and political scenario.

As a result, equities started 2017 on a positive note, with the Jakarta Stock Exchange index rising by 6.28% over Q1 in US dollar terms.

Good outlook for earnings growth

We see pockets of growth mainly in interest rate-sensitive sectors such as property and automotive, helped by the generally low interest-rate environment, macroprudential relaxation and strong consumer confidence; banks (as asset quality improves) and healthcare. Subdued inflationary pressures should bolster consumer purchasing power. Consumer confidence jumped from 115.3 in January to 121.5 in March, led by increasing business activity and job creation.

We continue to expect solid upward earnings growth revisions for 2017, up by 13%-15% by the end of 2017, based on our estimates. We see the main medium and long-term economic drivers as stemming from infrastructure-related sectors and domestic consumption. The likely acceleration in infrastructure spending should boost equity valuations in the construction sector, in our view.

Seven reasons to consider Indonesian equities in 2017

  1. Higher infrastructure spending >> improving investment climate
  2. Boost in consumption backdrop >> propping up corporate earnings
  3. Successful tax amnesty >> growing domestic liquidity
  4. Pro-active policy execution by the government
  5. Wider fiscal reforms >> structurally lifting government revenues & expenditure
  6. Earnings pick-up >> expected to grow by 13%-15% in 2017
  7. Undemanding valuations and high return on equity >> Indonesian equities’ average price earnings growth (PEG) is priced at 1.1x for 2017*, or a discount to the ASEAN peers’ average. Indonesia’s average return on equity (ROE) remains the highest in Asia.

Exhibit 2: Attractive valuation for higher returns – PEG and ROE (%)Indonesian government’s tax amnesty

Source: PT BNPP IP, Credit Suisse, 31 March 2017.

*PEG is estimated for 2018


This article was written by Ali Yahdin Saugi, Head of Indonesian Equities, and Jessica Tea, Junior Investment Specialist for Asia Pacific & Greater China & Indonesian Equities on 25 April 2017

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