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ECONOMIC UPDATE - Fiscal review - Too early to celebrate

ECONOMIC UPDATE - Fiscal review

Too early to celebrate 


Positive sign from tax but still too early to celebrate

Tax revenue still generate positive catalyst after it recorded 13.6% YoY growth (2017: 8.6% YoY) to Rp 160.7 tn (9.9% of target) in the first two month 2018 (2M18). However, we see believe that it is l too early to be optimistic as historically 2M revenue accounted for 12.5% of full-year number in the period of 2014-17 (see exhibit 2).  Income tax (non oil and gas) realization grew 12.3% YoY in 2M18 while value added tax (VAT) increased by 18.0% YoY, , the highest growth since 2015. Besides indicating better tax data basis due to tax amnesty, the significant growth also denoted better domestic economic activity than in beginning of 2017. Furthermore, finance ministry also noted that custom and excise revenue increased by 16.5% to Rp 7.4 tn even though the peak of this revenue will be in December. Weakening Rupiah so far and higher than estimated oil price also gave benefit for tax revenue side. This resulted to additional around Rp3 tn tax revenue a Rp39 tn (+34% YoY) from non-tax revenue.


Boosted by social spending

Government expenditure realization also showed a positive trend , growing by  10.4% YoY growth to Rp 249.1 tn in 2M18. Central government expenditure became the driver of growth as it grew 24.1% YoY to Rp 127.6 tn (8.8% of target). Higher social spending realization also helped government spending to grow higher. Through exhibit 3, we can see that social spending increased by 170.8% to Rp 13.9 tn, in line with higher budget allocation for social ministry and recipients of Program Keluarga harapan (PKH) of 10 mn households. Capital expenditure had a downtrend in Jan-Feb as its realization was Rp 4.5 tn, lower than 2016 and 2017. However, the realization trend of capital expenditure usually peaked at 4th quarter, different with social spending which is relatively steady through the year. For example, the realization of PKH was already started in January and February which pushed the social spending realization higher. Unfortunately, the realization of PKH cannot boost the retail sales yet in January as central bank recorded a contraction of -1.8% YoY. Nevertheless, we believe that higher social spending may lead to higher consumption in 1Q18 GDP data. Meanwhile, spending for regional transfer and village fund had a slight contraction of -0.98% YoY as government delayed some of regional transfer realization due to late financial report of some regions.


Dilemma of subsides and Moodys

The current higher oil price compared and weaker Rupiah are already above state budget 2018. Government targeted Rupiah at Rp 13,400/USD level and ICP at USD 48/barrel while current position of Rupiah was at Rp 13,700-Rp13,800/USD and ICP in February at USD 61.6/barrel. Finance Minister, Sri Mulyani, stated that government may change the assumption of ICP in revised state budget to USD 55 – USD 60/barrel. Higher ICP price meant higher subsidy burden in the state budget because government has promised to hold the subsidy fuel and electricity price until 2019. Government planned to increase subsidy amount for Solar from Rp500/liter to Rp 1,000/liter, implying to additional Rp 4.1 tn cost for subsidy budget. Moodys is seemed to against this plan by saying in its credit opinion that the plan may hurt Indonesia rating. The rating agency sees adding energy subsidy budget is the backward step of fiscal reform and may give uncertainty of further reform. However, Moodys still viewed Indonesia credit opinion as a positive due to low government debt ratio to GDP and future growth prospect. We still believe that Moodys will still raise Indonesia’s rating in 1H18.


Tax performance should continue with AEoI, see 2.4% deficit in FY 2018

We still see a possibility that budget deficit will widen to 2.4% as subsidy budget is potentially to increase in revised state budget on upward trend in  oil prices. However, the deficit remains healthy to boost the economic growth in 2018. We also expect that AEoI implementation with Singapore in 2H18 will help to boost Indonesia’s tax revenue.