Update COVID-19 in Indonesia: 70,736 confirmed infections, 3,417 deaths (9 July 2020)
6 July 2020 (closed)
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The central government of Indonesia and Commission XI within Indonesia's House of Representatives (DPR) agreed to set the nation's economic growth target at 5.1 percent (y/y) in the draft state budget for 2017. This target is 0.2 percentage points below the GDP growth target that was mentioned by Indonesian President Joko Widodo in a speech last month (based on a financial note) and is also below the 5.2 GDP growth target that was set in the Revised 2016 State Budget. Less optimistic forecasts are especially caused by a cut in government spending.
Recently, the Indonesian government announced that public spending has been cut by IDR 137.5 trillion (approx. USD $10.5 billion) for the remainder of 2016. Although this budget cut involves the 2016 state budget, it also affects next year's economy. In fact, we also expect to see cuts in the government's spending budgets in 2017. The reason being that budget cuts in the second half of 2016 are conducted because of weaker-than-estimated government revenue (weak tax revenue realization, low commodity prices as well as sluggish business expansion and consumer spending, reflected by Indonesia's relatively low corporate and consumer credit growth). There are no signs that government revenue in 2017 will show a marked improvement.
The government had high hopes for its tax amnesty program; the nine-month program that was launched in July 2016. Through this program the government eyes trillions of rupiah in (both onshore and offshore tax declarations (implying additional tax revenue) and fund repatriations into Indonesia (from the so-called tax havens). However - although it is too early to tell whether this program is a failure - it experienced a very slow start, hence missing out on additional state revenue.
Bank Indonesia Governor Agus Martowardojo stated earlier this week that the government's tax amnesty program is expected to boost tax revenue by IDR 21 billion (approx. USD $1.6 billion) only, while the government targets to collect IDR 165 trillion (approx. USD $12.5 billion in additional tax revenue. The revised outlook of Bank Indonesia is also down drastically from its initial forecast of IDR 46 trillion (approx. USD $3.5 billion) in additional tax revenue through the amnesty program. The disappointing start of the program has definitely made some central bankers turn pessimistic about the program's fruits.
However, given that the peak of asset declarations and repatriations under the tax amnesty program is assumed to occur in October, it is too soon too call the program a failure, particularly now several big Indonesian businessmen have recently joined the program and set a good example for other billionaires.
Tax Amnesty Program Indonesia - Score So Far:
(in IDR trillion)
|Per 07 Sep '16
(in IDR trillion)
|Declaration of Funds||4,000.0||298.2||7.5%|
|Repatriation of Funds||1,000.0||15.3||1.5%|
But chances remain big that the government's tax revenue targets - whether related to the amnesty program or not - will not be achieved in 2016 and 2017. In fact a wide shortfall is expected. With Indonesia's exports remaining in slowdown mode (particularly due to low commodity prices) and business expansion remaining sluggish in Southeast Asia's largest economy (affecting corporate income tax) the government needs to curb public spending in order to avert a further widening budget deficit. Recently, Indonesian Finance Minister Sri Mulyani Indrawati said the government budget deficit is expected to widen to 2.5 percent of GDP in 2016, not far from the maximum limit of 3 percent of GDP.
Indrawati said the 5.1 percent (y/y) economic growth target for 2017 is supported by rising direct investment in Indonesia and strong household consumption (which forms the main engine of Indonesia's economic growth, contributing approximately 57 percent to the nation's overall growth). Meanwhile, global economic growth is not expected to lend a helping hand to Indonesia. According to the finance minister, global growth will remain around 3 percent (y/y) and she doubts that the International Monetary Fund's 3.1 percent (y/y) target for global growth in 2016 can be achieved.
A recently published report from advisory company Oxford Economics and the Institute of Chartered Accountants of England and Wales (ICAEW) states that rising direct investment in Indonesia may compensate for weaker-than-estimated government spending. Considering that Indonesia's output gap (that is the difference between actual and potential economic output) is smaller compared to that of other emerging market economies, Indonesia is an attractive option for investors. The report also notes that Indonesia is among the world's top 20 of most competitive manufacturing locations.
2017 State Budget
annual percent change
annual percent change
|3 - 5|
percentage of labor force
percentage of population
Sources: Finance Ministry & Commission XI DPR
Indonesia's Quarterly GDP Growth 2009-2016 (annual % change):
|Year|| Quarter I
||Quarter II||Quarter III||Quarter IV||Full-Year|
Source: Statistics Indonesia (BPS)