If we look back on the month of April, two important matters - related to the economy - occurred in Indonesia this month: (1) in the first week of April, the Indonesian government managed to complete the Revised 2016 State Budget (RAPBN-P 2016), and, one week later, (2) the central bank (Bank Indonesia) announced it will adopt a new benchmark monetary tool per 19 August 2016 - the so-called seven-day reverse repurchase rate - that is to replace the existing BI rate (which fails to influence market liquidity effectively).
Regarding the state budget, the Indonesian government is still in some difficulty to find enough revenue to finance its spending programs amid persistently low commodity prices, sluggish domestic and global economic growth, and the delay in implementation of the Tax Amnesty Bill.
This bill, currently being discussed in Indonesia's House of Representatives is estimated to bring home between IDR 500 trillion (approx. USD $38 billion) and IDR 1,000 trillion (approx. USD $76 billion) in offshore assets and it could increase Indonesia's tax revenue by between IDR 40 trillion and IDR 100 trillion according to estimations of financial authorities such as Bank Indonesia and the Financial Services Authority (OJK). If the House agrees to the bill - and if former tax evaders indeed want to make use of the incentives included in this bill - it would solve some problems for the government. According to the latest news stories, the government is now seeking about USD $2 billion in bonds or loans to cover its widening fiscal deficit (with the budget deficit widening from an initially budgeted 2.2 percent of GDP to a revised 2.5 percent this year due to a shortfall in tax receipts). Given this context, the Tax Amnesty Bill would be a great instrument for fresh funds.
The Revised 2016 State Budget also confirms that the Indonesian government remains committed to its target to push for infrastructure development across Southeast Asia's largest economy despite the shortfall in government revenue. The government continues to cut spending on energy subsidies, and redirecting these funds to the infrastructure development budget. In the first week of April the government announced that it will end subsidies for 18 million Indonesian electricity consumers per June 2016 in a bid to curtail unproductive state spending. This move would cut the nation's electricity subsidy spending to IDR 38 trillion (approx. USD $3 billion) in 2016 from IDR 66 trillion one year earlier.
The other important news story is the decision of Bank Indonesia to make its seven-day reverse repurchase rate (reverse repo), which stood at 5.50 percent in the central bank's last auction, the nation's new benchmark monetary tool, hence replacing the existing BI rate, which has been unable to push down lending rates significantly, despite Bank Indonesia having cut its BI rate by 75 basis points from 7.50 percent to 6.75 percent (gradually) in the first three policy meetings of 2016. Per 19 August 2016 this new benchmark will come into effect.
The seven-day reverse repo rate is the rate on government bonds (surat utang negara, SUN) sold by the central bank to local commercial banks with the requirement that these bonds are bought back by Bank Indonesia within seven days. The existing BI rate, on the other hand, has a tenor of one year, implying that the new benchmark is much more flexible to incorporate the latest dynamics in the nation's financial markets.
SUNs are the main instrument of the central government to add debt in order to finance the state budgets. This is where there emerges a dilemma for the government. On the one hand, high coupon rates on SUNs will make it attractive for investors to invest in these bonds, hence collecting funds to cover the budget deficit. On the other, hand high coupon rates raises the costs for the government.
The transition to the seven-day reverse repo also gives rise to questions whether the full independence of Bank Indonesia remains intact as its future key monetary tool is directly linked to the financing of the government's state budget. Based on Indonesian law the central bank cannot be intervened in terms of formulating its monetary policy.
The new benchmark also implies that Bank Indonesia basically admits that it has been holding on to an inefficient monetary tool for 11 years. For instance, inflation targets set by Bank Indonesia at the year-start have often not been achieved at the year-end (although the government is also responsible for this situation due to administered price adjustments or its failure to safeguard the country's food supplies).
Inflation in Indonesia and Central Bank Target 2008-2016:
(annual % change)
|Central Bank Target
(annual % change)
Source: Bank Indonesia
Regarding the Indonesian rupiah rate, it has been stable over the past two months at around IDR 13,200 per US dollar. The rupiah has in fact appreciated around 4.5 percent against the US dollar so far this year. However, this appreciation may not reflect domestic strengths but rather external weaknesses as the strengthening of the rupiah is primarily caused by capital inflows brought about by negative interest rates in the Eurozone and Japan, while another US interest rate hike is not expected to occur before June 2016.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia