Credit rating agency Moody's Investors Service said it could cut its rating for Indonesia if government revenue remains weak. Indonesia needs to push for structural tax reforms in order to boost tax revenue. Since 2012 Moody's has put Indonesia at Baa3 (investment grade), while in early 2017 Moody's upgraded its outlook for Indonesia from stable to positive.
Tax revenue collection is structurally weak in Indonesia, where the government's tax targets - set in the annual state budget - are often missed. In the first 10 months of 2017, a total of IDR 858.1 trillion has been collected in taxes. However, this is only 66.8 percent of the full-year 2017 tax revenue target and therefore it is safe to conclude that Indonesia will, again, not achieve its tax revenue target this year. This is a problem because around 90 percent of government revenue stems from tax revenue. And without enough revenue, the government struggles to finance its development programs.
When we compare Indonesia to other countries that have obtained the Baa3 credit rating from Moody's, then we see that Indonesia ranks among the lowest in terms of government revenue realization. In Indonesia, government revenue equals 13 percent of gross domestic product (GDP). However, for Thailand and Malaysia this figure is 15 percent of GDP.
Meanwhile, Moody's expects growth of government revenue in Indonesia to slow in 2018 and remain stagnant in 2019 as momentum of the tax amnesty program fades.
Besides weak tax revenue, Moody's is also concerned about Indonesia's continuously rising foreign debt. The country's foreign debt amounted to USD $343.1 billion at the end of Q3-2017, up 4.5 percent year-on-year (y/y). While several years ago the ratio of Indonesia's external debt to GDP was around 26 percent, it has risen to 34 percent at the end of Q3-2017 (but lower than the 36 percent that was recorded in the same quarter on year earlier). Indonesia's central bank (Bank Indonesia), however, stated that this debt is manageable and added that the ratio of short-term debt to total external debt is steady at around 13 percent. Moreover, both these ratios are better than the average ratio of peer countries.