Chartering a new fiscal course

Transcription

1 Early Warning Briefing Note issued: October 31 st, 2017 Economic, Banking & Industry Research of BCA Group - DKP Chartering a new fiscal course Executive Summary: APBN 2018 is set with a relatively narrow budget deficit (2.19% of GDP) compared to This gives the budget greater flexibility, even if the macro environment proves less favorable than the slightly optimistic assumptions, amidst continuing shifts in the global economy. Expenditure growth has slowed down, weakening the potential fiscal stimulus effect although at the same time, moderating the potential crowding-out effect. There is a notable shift in priorities from infrastructure to social spending, which indicates a growing concern over consumption and purchasing power ahead of the political year. Revenue remains a concern, even though we might be seeing some marginal improvement in tax collection this year as well as in the future. Budget assumptions slightly more optimistic On October 25 th, the House of Representatives (DPR) finally approved the 2018 State Budget (APBN) to be Two other macro assumptions, namely 5.4% YoY GDP growth and 3.5% inflation, are unchanged and remain passed into law. Compared to the government s in line with market consensus, but also in our view- original proposal, there were a couple of changes tending towards the optimistic side of things. In par- in assumptions that could be considered somewhat optimistic. The exchange rate, for example, is ticular, these assumptions overlook the normal tradeoff between growth and inflation. set at Rp 13,400/USD, 100 points stronger relative to the proposal. The 3-Month government borrowing cost is also expected to be slightly lower at 5.2% (vs. 5.3% in the proposal). There is, therefore, a decent chance that the budgetary targets could be missed due to changing macro circumstances. In cases of higher-than-expected inflation or weaker-than-expected exchange rates, the Altogether, these changes reflect expectations that impact on budget deficit might not be too severe, as the Fed will not too rapidly tighten its policy in line with the market which expects only two rate hikes in the higher spending could be offset by increased revenues from taxes and commodities. Weaker-than However, there is a reasonable chance that the Dollar could be stronger (and interest rates expected growth or higher-than-expected global rates, however, will definitely widen the budget higher) next year, depending on among othersthe selection of new Fed chairman and the suc- deficit. Both of these are quite plausible given the moderating (albeit more stable) growth in China and cess of President Trump s economic agenda. the tightening path of global central banks. Changing priorities in the political year The newly-approved 2018 Budget targets Rp 1,894.7 Tn in central government revenue and Rp 2,220.7 Tn in spending. Each of these figures are slightly higher than the proposal (by Rp 16 Tn), but the deficit stays the same at Rp Tn (2.19% of the GDP). As we have mentioned before, this is the narrowest deficit so far under the Jokowi administration, which should give some leeway for adverse circumstances and reduce (but not eliminate) the probability of mid-year budget revision. The spending allocation still reflects the government s shifting priorities. Although infrastructure funding is still growing (at 2.4%), the budget for subsidies and social spending is growing faster (3.7%). Furthermore, if we look at the Revised 2017 Budget, there had actually been a sharp increase in social spending (16.8%) earlier. We could not help but notice that such spending tend to increase in the year(s) leading to General Elections, with the 2008 and 2013 Budgets also showing similar patterns. This new populist direction is accompanied by some shift in disbursement pattern, which hopefully would improve its effectiveness. The increase in subsidies is mostly limited to energy items (especially LPG), in PT Bank Central Asia Tbk 20 th Grand Indonesia, BCA Tower Jl. M.H Thamrin No. 1 Jakarta, Indonesia Ph : (62-21)

2 order to dampen inflation, whereas non-energy subsidies are minimized by the government s focus on the more targeted non-cash food assistance (BNPT). The government is also extending the reach of its direct conditional cash transfer scheme (Family Hope Program), from 6 Million to 10 Million households, and raise its Regional Transfers and Village Funds budget to Rp Tn (up 1.3%). These are aimed at reducing inequality, especially in regional terms, and improving the quality of public services. Irrespective of the priorities, the increase in government spending is noticeably slower than in previous years. This limits the fiscal stimulus effect, implying that next year s growth acceleration needs to come mostly from investment and exports. In our view, however, this is a necessary situation, given the increasing evidence of a crowding out effect as well as the well-documented difficulties in raising revenue. Coming to terms with revenue challenges The revenue side remains a distinct challenge for the Jokowi administration, since weak commodity prices means that the government has to rely on tax revenues, as opposed to non-tax incomes (PNBP). However, tax collection continues to be subpar, with the tax/gdp ratio having declined below 11% since 2014 also on account of lower commodity prices and declining export and import activities. There is evidence that the government s tax collection efforts is improving somewhat compared to the previous two years, if we look at monthly collection relative to the annual target (Chart 2). However, we should note that the government has always revised the tax revenue target in mid-year, and 2017 was no exception (down 1.7% to Rp 1,472.7 Tn). This marginal improvement is also falling far short of the heady expectations from the tax amnesty program and the adoption of new policies to reduce tax fraud and avoidance. To be sure, there are still things that the government can attempt to raise revenue in One is increasing the excise duty on tobacco products by an average of 10.4%, which could, nevertheless, depress the economy of tobacco-producing areas. The implementation of the Automatic Exchange of Information 1 (AEoI) in order to investigate tax evasion abroad, as well as joint audit targeting exporters and importers, are predicted to increase the tax ratio by 1% in the longer run, but their impact in 2018 will probably be lower. Another option is for the government to intensify and streamline the value added tax (VAT), similar to what has been recently done in China and India. Despite the well-publicized slackening in consumption, the VAT collection has actually been better than average this year. On the other hand, continuing to intensify income tax collection might lead to greater uncertainty and even higher rates of tax avoidance, further hurting the business sentiment. 1 AEoI : the exchange of information between countries without having to request it 2

3 Tabel 1. The government expects growth to accelerate modestly, even as inflation is expected to decline Budget Assumptions Budget Realization Budget Realization Budget Budget Growth (% YoY) Inflation (% YoY) Exchange rate (Rp/USD) 12,500 13,392 13,500 13,307 13,400 13,400 3-mo sov. Yield SPN (%) Indonesian Crude Price (US$/brl) Crude oil production ('000 brl/day) Gas production ('000 brl*/day) 1,221 1,195 1,150 1,180 1,150 1,200 *) Barrel of oil equivalent Category Tabel 2. The budget deficit is expected to narrow, but could miss due to tax shortfall, slower-than-expected growth, or higher borrowing rates 2015 (Rp Tn) 2016 (Rp Tn) 2017 (Rp Tn) 2018 (Rp Tn) Budget Realization % Budget Realization % Budget Budget Total Revenue % % Tax Revenue % % Non-Tax Revenue % % Total Spending % % Central Government Spending Regional Transfer and Village Fund Budget Deficit % % % % % of GDP % of GDP (2.93% of GDP) (2.19% of GDP) 3

4 Chart 1. Indonesia's tax ratio that declined 5 years in a row in contrast to the growing level of spending 14% 12% 10% Tax revenue/gdp 12.2% 12.4% 13.3% 11.1% 11.3% 11.8% 11.9% 11.9% 10.9% 10.8% 10.4% 10.9% 10.8% 8% '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17F '18F Chart 2. The realization of tax collection have somewhat improved compared to previous years % Realization Jan Feb Mar April May June July Aug Sept Okt Nov Dec * Target is revised from Rp 1,498.9 Source : Ministry of Finance : Rp 1,489.3 Tn 2016 : Rp 1,546.7 Tn 2017 : Rp 1,472.7*

5 Indonesia Economic Indicators Projection E Gross Domestic Product (% YoY) GDP per capita (US$) Consumer Price Index Inflation (% YoY) BI 7 day Repo Rate (%) Exchange Rate of Rupiah (end of year)* 9,793 12,171 12,388 13,800 13,473 13,433 Trade Balance (US$ billion) Current Account Balance (% GDP) * Estimation of the Rupiah s fundamental value against the US Dollar Economic, Banking & Industry Research Team David E. Sumual Chief Economist david_sumual@bca.co.id Ext Agus Salim Barra Kukuh Mamia Victor George Petrus Matindas Industry Analyst Economist / Analyst Industry Analyst agus_lim@bca.co.id barra_mamia@bca.co.id victor_matindas@bca.co.id Ext Ext: Ext: Henry Tedja Gabriella Yolivia Syarifudin Economist / Analyst Economist / Analyst Research Assistant henry_tedja@bca.co.id gabriella_yolivia@bca.co.id syarifudin_bustomi@bca.co.id Ext: Ext: Ext: PT Bank Central Asia Tbk Economic, Banking & Industry Research of BCA Group - DKP 20 th Grand Indonesia, Menara BCA Jl. M.H Thamrin No. 1, Jakarta 10310, Indonesia Ph : (62-21) Fax : (62-21) DISCLAIMER This report is for information only, and is not intended as an offer or solicitation with respect to the purchase or sale of a security. We deem that the information contained in this report has been taken from sources which we deem reliable. However, we do not guarantee their accuracy, and any such information may be incomplete or condensed. None of PT. Bank Central Asia Tbk, and/or its affiliated companies and/or their respective employees and/or agents makes any representation or warranty (express or implied) or accepts any responsibility or liability as to, or in relation to, the accuracy or completeness of the information and opinions contained in this report or as to any information contained in this report or any other such information or opinions remaining unchanged after the issue thereof. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. Opinion expressed is the analysts current personal views as of the date appearing on this material only, and subject to change without notice. It is intended for the use by recipient only and may not be reproduced or copied/photocopied or duplicated or made available in any form, by any means, or redistributed to others without written permission of PT Bank Central Asia Tbk. All opinions and estimates included in this report are based on certain assumptions. Actual results may differ materially. In considering any investments you should make your own independent assessment and seek your own professional financial and legal advice. For further information please contact: (62-21) , Ext: or fax to: (62-21) or syarifudin_bustomi@bca.co.id 5