Indonesia’s Fiscal Dilemma
by Wayne Forrest
After gaining a three year increase of the national budget deficit from 3% to 6% in 2020 and offering many tax incentives to boost employment (reduced corporate taxes) the Indonesian government is facing a fiscal shortage of dramatic importance. In legendary fashion, given Indonesia’s long history of fiscal rectitude, Finance Minister Sri Mulyani hopes to avoid any debt rescheduling, currency controls or a drop in the sovereign rating. She recently defended the need for a new tax bill before Parliament and is clearly preparing the way for an increase in individual tax rates, changes to the value-added tax (VAT) and the adoption of the recently proposed global minimum corporate tax. Its not clear how Indonesia can gain the necessary tax revenues by 2023 to eliminate the gap in the budget deficit caused by the pandemic unless Parliament agrees to a new bill on general taxation. “This is how we continuously reform tax policies and bureaucracy to reflect the principles of justice, inter-sectoral justice between income groups, and to create legal certainty,” Sri Mulyani told lawmakers during a hearing with the House of Representatives on Monday. The only alternative would be reduced government spending, a tough option. Expect the highly competent and politically-neutral Finance Minister to prevail.
These fiscal problems at the national level are mirrored in the banking system where banks, empowered by OJK pandemic rules, have been allowed to restructure loans. But these loans could become a ticking time bomb in the future, echoing the 1998 credit crunch that brought Indonesia to its knees.
Cigarette Factories Grow in Central Java Despite ‘Pandemic Economy’
The pandemic may have increased smoking in Indonesia. Citing Antara News, the Jepara regency’s licensing department has handled many permits for new cigarette factories. As of the number, there were initially roughly 80 cigarette factories and has now grown to 114 factories,” said the Kudus Customs and Excise Supervision and Service Office Head, Gatot Sugeng Wibowo on June 28. According to him, the number of new factories went up to 111 in February this year and increased again to 114 in June in both Kudus and Jepara regions. He claimed this number could rise as there were more permits being submitted currently. Wibowo believed the rise in the cigarette business was also due to the shift in behavior of smokers during the pandemic where consumers of Class I cigarettes switched to Class II and III cigarettes that were sold under more affordable prices. This is backed by the data where Group II and III cigarette brands have increased production whereas Group I brands slumped in sales. (Antara News, Tempo)
Indonesian homeownership slides as affordability issues arise
Homeownership in Indonesia has been dropping since 1999 as house prices have risen. Now, the affordability of homes is under further threat as a number of people face declines in real income as a result of the pandemic. The national share of households with a home of their own fell to just over 80 percent last year from nearly 85 percent in 1999, according to data from Statistics Indonesia (BPS). Jakarta recorded the lowest share last year. The fall in Jakarta homeownership is in line with the share of households renting a home in the city, at 37.71 percent last year, higher than any other province, as workers flock to the capital to find jobs. (Jakarta Post)
Less Reliance on US Dollar
Bank Indonesia announced that Indonesia and China were closer to a reducing their reliance on the US dollar. The switch to local currency settlement (LCS) is expected to take place in the third quarter of this year. Bank Indonesia’s head of financial market development, Donny Hutabarat, said the move was part of Indonesia’s effort to diversify currencies used in trade and investment with bilateral partners. So far, Indonesia has agreed on LCS with Malaysia, Thailand and Japan. “So, we do not depend 100 percent on the US dollar anymore,” Donny told reporters during an online media briefing on Friday. “[LCS with China] will be implemented around July or [later in] the third quarter,” Donny said
Bankrupt Garuda Weighing Options as New Airline Emerges
The beleaguered Indonesian national airline is trying to avoid a cash injection from the government, strapped as it is with funding COVID relief efforts. Its President Director announced the airline is considering several workout options including: relief from creditors via loan rescheduling, forming a new carrier while Garuda is being restructured or a conversion of debt to equity.
Meanwhile Indonesia is welcoming Super Air Jet (SAJ), a new low-cost carrier reportedly backed by Lion Air Group, to the market at a time when the aviation industry is working its way out of a slump caused by the COVID-19 pandemic. If the new player passes all regulatory hurdles it comes into the market unencumbered by foregin currency loans as its cpaital ius reported to be only from local investors. Debtwire also reported that, according to Law and Human Rights Ministry records it had acquired, SAJ was owned by Davin and Farian Kirana, the sons of brothers Rusdi and Kusnan Kirana, respectively, the founders of Lion Air Group.
Indonesian Importers Hesitant: KADIN
Indonesia’s imports may fall back to levels not seen since last summer as manufacturers face renewed risks following the recent surge in COVID-19 cases and deaths, the Indonesian Chamber of Commerce and Industry (Kadin) has said. Kadin deputy chairwoman Shinta Kamdani said she was expecting import growth to slow down again in the next one to three months as manufacturers remained under pressure and had no room for speculative imports, such as hoarding raw materials. “Instead, companies limit imports and production [and decide on these] depending on placed orders or [current] demand, so that their overhead costs do not swell up and make cash flow vulnerable at a time when uncertainty about domestic demand remains high,” Shinta told The Jakarta Post in a text message on Monday. (Jakarta Post)
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