Indonesia plans policies that may include a fiscal stimulus and tax holidays for companies, as the country relies on investment to shore up a current account deficit and flagging economic growth.
President Susilo Bambang Yudhoyono may announce the stimulus and tax changes today as part of a policy package to address the economic situation, Firmanzah, a senior official at the presidential office, told reporters in Jakarta yesterday. The government will also speed up a planned revision of limits on foreign investment in certain industries, Hatta Rajasa, the senior minister for the economy, said yesterday, without elaborating when it will be announced.
The government is seeking to take action as the rupiah fell 4 percent and the Jakarta stock market slid 8.7 percent in the first four days of this week, after worse-than-expected economic data. Indonesia’s current-account deficit widened to a record in the second quarter and foreign direct investment grew at its slowest pace in three years.
“Tax holidays might interest some more investors but that is not an overnight fix,” Keith Loveard, head of risk analysis at Concord Consulting in Jakarta, said in an e-mail yesterday. “Nothing has been done during the good times to fix the structural problems.”
Economic growth has held above four percent since Yudhoyono came to power in 2004, and he gave a favorable assessment of his record in a speech on Aug. 16. Expansion has slowed for the last four quarters, dipping below 6 percent in the three months through June for the first time since 2010. It will be difficult to reach the government’s target of 6.3 percent this year, Yudhoyono told reporters on Aug. 21.
Dealing with the current-account deficit and stabilizing the rupiah were two of the main priorities, Rajasa said yesterday, after a flurry of ministerial meetings to work on the package. The government is coordinating its policies with the private sector and the monetary authority, he said.
The central bank raised interest rates by a total of 75 basis points in June and July to calm food and fuel price pressures that drove inflation to a four-year high in July.
The country needs aggressive monetary tightening such as raising the central bank rate and reducing liquidity, otherwise the selling pressure on the rupiah may continue, Irene Cheung, a strategist at Australia & New Zealand Banking Group Ltd (ANZ) in Singapore, said yesterday in an interview. Bank Indonesia needs to raise the policy rate by 50 basis points, Citigroup Inc wrote in a note to clients on Aug. 21.
The government may introduce policies to reduce the balance of payment pressure, including incentives to boost exports and investment inflows, Euben Paracuelles, an economist at Nomura Holdings Inc, in Singapore, said in an interview yesterday. It may also signal increased spending on projects, while regulations to allow state-owned companies to buy shares and help stabilize bonds are likely, he said.
The government has already given state-owned firms the go-ahead to buy back shares, and some firms are seeking shareholder approval to do so, Dahlan Iskan, the state enterprises minister, told Bloomberg TV Indonesia yesterday, without giving details on firms.
“We’re studying whether we will buy back our shares,” Dwi Soetjipto, president director of state-owned cement maker PT Semen Indonesia (SMGR), told reporters on Aug. 21. “We still don’t understand why everyone is panicking on the financial situation.”
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