Government Indonesia Offers Tax Breaks to Improve Current Account
Per May 2015 the government of Indonesia will offer tax breaks to companies that export a minimum of 30 percent of their production. Earlier this month, Indonesian President Joko Widodo signed a package that includes the tax break for exporters as well as a tax break for multinational companies that are willing to re-invest profits in Indonesia instead of sending profits and dividends to shareholders abroad. This package is designed to improve Indonesia’s trade balance (and the related current account balance).
Since late 2011 Indonesia has been plagued by a wide current account deficit, signalling that Indonesia is dependent on foreign capital inflows. This deficit is a financial weakness that is closely monitored by investors. In times of global economic turmoil, investors quickly sell emerging market assets, particularly when these markets show financial weaknesses such as a wide current account deficit.
In 2014 Indonesia’s current account deficit amounted to USD $26.2 billion, equivalent to 2.95 percent of the country’s gross domestic product (GDP) from a (revised) deficit of USD $29.1 billion (3.18 percent of GDP) in 2013. The central bank of Indonesia (Bank Indonesia) expects to see a current account deficit in the range of 2.8 to 3.0 percent of GDP in 2015.
The government is eager to improve the current account balance - through boosting exports while limiting imports - ahead of looming further US monetary tightening (higher US interest rates) in a bid to curb capital outflows and support the Indonesian rupiah which has depreciated sharply against the US dollar since mid-2013 when the Federal Reserve started to speculate about ending its massive quantitative easing program.
Indonesian Rupiah versus US Dollar (JISDOR):
| Source: Bank IndonesiaFactors that have caused Indonesia’s current account deficit are the ending of the 2000s commodities boom, sluggish global economic growth, an underdeveloped export-oriented manufacturing industry, and costly oil imports. In the first quarter of 2015, Indonesian exports declined 11.7 percent to USD $39.1 billion from the same quarter last year.
Regarding costly oil imports, the Indonesian government has already reformed its generous subsidized fuel policy at the start of 2015 (which was a relatively easy reform amid the world’s low petroleum prices), and should result in a lower value of oil imports.
However, Standard Chartered Bank economist Eric Sugandi said that tax incentives will not be enough to boost exports as it depends on companies’ business model whether they export or are domestic market-oriented. Companies that focus on the domestic market will not suddenly start exporting products due to the export tax break. Instead the government should focus on infrastructure and land as these are matters that investors want, according to Sugandi.