Indonesia strategy 1Q: The catalyst and the risks ~ CIMB

6:50 AM | January 6, 2016 Macro View No Comments

■ The government started 2016 by cutting energy prices. This could help boost the purchasing power of consumers and tame inflation expectations.

■ However, a shortfall in tax collection remains a risk this year, following an indicated collection realisation of only 85% in 2015.

■ The successful execution of a tax amnesty programme could help lower the shortfall while, at the same time, improve both consumer and business confidence.


Following the 16% mom plunge in oil prices in Dec 2015, the government cut the prices for both subsidised diesel and RON 88 gasoline by 5-16% effective 5 Jan. Other fuel prices also followed suit, with Pertamina cutting the prices of non- subsidised diesel, RON 90, 92 and 95, as well as LPG prices, by 2-7%. It also cut the industrial diesel price by 12% this month.

In line with the lower oil prices, the state-owned electricity company PLN also cut its electricity tariffs for non-subsidised users in Jan by 7-9%.

While we think these moves could improve purchasing power and tame inflation expectations, the direct impact could be minimal as fuel, transportation, electricity and LPG costs only make up an estimated 9% of average monthly spending. The overall impact could turn out better if the lower industrial costs are passed on to customers. Even so, it appears that the government is determined to drive up purchasing power.

On the other hand, Dec 15’s mom inflation of +0.96% was at the high end of the range of the country’s historical monthly inflation (ex. fuel subsidies adjustments) driven by a spike in spice prices following the prolonged dry season. The government’s move to import key foodstuffs could also help to moderate this year’s inflation numbers.


The government reports that the indicated realisation of the country’s 2015 budget expenditure has reached 91% of the Rp1,984tr budgeted. Of this, the realisation for capital spending (mainly infrastructure) stood at 84% (or Rp213tr), up 54% yoy.

The realisation on the revenue side, however, was lower at 85% of the budgeted Rp1,762tr, mainly due to a shortfall in tax collection (with realisation of only 83% of the budgeted Rp1,489tr), implying a tax collection shortfall of Rp253tr.

As such, this resulted in an estimated higher budget deficit of 2.8% of GDP (vs. the budgeted 1.9%). Much of the additional funding requirements were sourced via domestic debt issuances.

The weak 2015 tax revenue collection numbers mean that the implied target collection growth for 2016 should be 27%. This will be difficult to achieve as the target far exceeds the 14% tax collection CAGR over the past 10 years.


The parliament has put the tax amnesty bill on its priority list when it reopens by mid- Jan, with approval expected in 1Q16. Various news reports suggest that there is enough support from lawmakers to pass the law.

The timely approval of the tax amnesty bill could be the saving grace for this year’s tax collection. The government estimates that this could translate into an additional US$4.4bn (or around Rp61tr) of tax collection revenue this year. We also note that the successful execution of the tax amnesty programme should help boost both business and consumer confidence, and thus catalyse consumption and investment.