Tax Amnesty Windfall Brightens Indonesia's S&P Upgrade OddsBy and
Amnesty reveals $365 billion of previously undeclared assets
Upgrade seen as catalyst for bond market inflows, Goldman says
After netting more than $10 billion in revenue from its tax amnesty program, Indonesia may be a step closer to winning a much-coveted investment grade from S&P Global Ratings.
The nine-month amnesty drive, which ended on Friday, led citizens to declare 4,866 trillion rupiah ($365 billion) of assets hidden from tax authorities. The success may help Southeast Asia’s largest economy win an upgrade from S&P, according to Oversea-Chinese Banking Corp. and DBS Group Holdings Ltd.
President Joko Widodo has been pushing for an upgrade from S&P, the only main credit-rating company still keeping Indonesia at junk status. An investment grade would boost the country’s appeal among conservative Japanese institutional investors, potentially boosting inflows by $3 billion to $5 billion over the next year, Goldman Sachs Group Inc. estimated in March.
“It’s imminent that Indonesia gets back to investment grade rating," said Gundy Cahyadi, an economist at DBS in Singapore. “There has been significant improvement made on all fronts. The broadening of the tax base is going to be a plus in terms of how we look at the overall fiscal standing.”
Richard Noonan, a spokesman for S&P, declined to comment on the tax amnesty. The company in January said it may upgrade Indonesia to investment grade in 2017 or 2018 if the country delivered better spending, ensured that deficits were on a declining trend, and moderated government debt.
The amnesty program was a key plank in Widodo’s push to boost revenue needed to fund ambitious spending plans as the country struggles to return to historic levels of economic growth. The government cut spending last year to meet a legal cap on its fiscal deficit and rebuilt foreign exchange reserves to a five-year high of almost $120 billion.
“The onus is for them to explain to the investor base what exactly is holding them back,” Wellian Wiranto, an economist at Oversea-Chinese in Singapore, said of S&P’s position on Indonesia.
More than 970,000 people took part in the amnesty, which began in July with the government netting about 135 trillion rupiah in revenue. Still, speaking on Friday night Indonesia’s Finance Minister Sri Mulyani Indrawati said there were still many individuals and businesses that did not participate, adding that she was convinced not all are compliant.
“There are still high-net worth individuals who didn’t participate,” said Indrawati, who has warned authorities would come down hard on tax evaders in the wake of the amnesty, which offered generous penalty rates of as low as two percent. “The people’s tax compliance still needs to be improved.”
While 1,032 trillion rupiah was declared from offshore locations, just 147 trillion rupiah was repatriated with trillions more set to remain in countries such as Singapore, the British Virgin Islands, Hong Kong, the Cayman Islands, and Australia, according to the finance ministry. Indrawati has pledged more reforms as the government seeks to lift the tax-to-gross-domestic-product ratio to 15 percent by 2020 from 11 percent.
The finance minister has pointed to recent reforms in Indonesia as a reason why the nation was deserving of an upgrade from S&P. Danny Suwanapruti, a Singapore-based analyst at Goldman Sachs, wrote in a report last month that S&P would probably lift Indonesia’s debt rating to BBB- within the next six months.
“An upgrade would be a potential catalyst for additional inflows into the bond market from some categories of Japanese investors,” Andrew Tilton, Goldman Sachs’ chief Asia-Pacific economist, said Friday. “By itself the amnesty is not a game changer, it’s helpful in the short term. But if it’s part of a sequence of things that fit together and do expand the tax base, then it can be pretty meaningful a couple of years out.”
Foreign investors have poured in a net $4.2 billion into Indonesian government bonds this year, while inflows into stocks totaled $626 million, driving the benchmark Jakarta Composite Index to a record. The index rose 0.7 percent close at 5,606.79 on Monday, extending gains to 5.9 percent this year.
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