Finance

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

The upcoming amnesty for Indonesia's tax-cheating elites could well become a pardon for the country's deposit-starved banks.

Between July and March next year, Indonesians can declare their undisclosed assets and repatriate them from overseas, where they're commonly held, by paying a levy of between 2 percent and 5 percent.

Nobody quite knows just how much wealth is parked in property and other assets abroad. Start with Global Financial Integrity's estimate that $180 billion has illicitly left the country since 2004. Conservatively assume that the current value of assets purchased with those financial flows is at least twice as much. That's already a staggering $360 billion. If even 10 percent of it flows back over the next nine months, the country's financial system gains a cool $36 billion.

Come Home
Indonesia has seen $180 billion leave the country illicitly in 10 years
Source: Global Financial Integrity

That's a bonanza for banks struggling to get over the end of a China-led commodities boom. Together, lenders have $332 billion in deposits that are increasing at an annual 6 percent pace -- a far cry from the 15 percent average growth witnessed since 2005.

Depositors' Strike
Indonesia's banking system could do with a shot of liquidity, and a tax amnesty plan could help
Source: Bank Indonesia, Bloomberg

A lift to the deposit base will be great news for banks that find it hard to coax the archipelago's 256 million people to park their savings with them. Four lenders -- Bank Mandiri, Bank Rakyat, Bank Central Asia and Bank Negara -- corner half of all deposits. That leaves more than a 100 others, including HSBC, Standard Chartered, Citigroup and DBS, scrambling for a share of the rest.

The extra tax collected by the government will do double duty. When President Joko Widodo spends the money on badly needed infrastructure projects, lenders will see an increase in loan demand, particularly from construction and materials companies such as Indocement, Semen Indonesia and Jaya Konstruksi, whose shares have fallen between 11 percent and 25 percent this year. In the absence of a deep local-currency corporate bond market, any gains from new credit growth will primarily go to banks.

Second Wind
Construction and materials stocks in Indonesia could gain if the government spends its tax amnesty proceeds
Source: Bloomberg
*Market capitalization-weighted index of 30 construction and materials companies.

All this presupposes that those disclosing their wealth will trust the government's promise that information given by them won't be used to initiate criminal proceedings -- unless they're declaring spoils from human trafficking or drug cartels. Still, it's not all carrots. There's plenty of inducement in the looming big stick of eventual discovery.

Come 2018, countries will begin automatic exchange of information on tax evasion. No wonder there's an amnesty program afoot in India as well. That's another large economy where banks are struggling to raise deposits. But Indian lenders, especially the state-run ones, are drowning in soured debt. Indonesia's bad-loan problem is nowhere near as big. Companies with profit less than their interest costs collectively owe just $10 billion, according to former CLSA banking analyst Daniel Tabbush. In a banking system with $347 billion in outstanding credit, that's a number investors can forgive.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. See "Indonesia -- Rising Bad Loans Not as Dire as Some Make Out," published by Smartkarma on June 14. 

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net