Indonesia’s tax amnesty:Top five questions

　　What, why, when and more…

　　The much talked-about tax amnesty bill was supposed to have been ratified andpassed into law as early as Q1 2016, but the latest media reports now suggest thatthe bill could be passed by parliament before 28 June, and implemented on 1 July(Bisnis, 21 June).

　　Its ratification by the House of Representatives is likely to bring some relief toinvestors. Our note discusses five key questions surrounding the tax amnesty bill:what is it about, what is the potential timeline, why does Indonesia need a taxamnesty, will it work, and what are the implications for the economy and bondmarket?With state revenues under cyclical pressure and a five-year IDR5,500trninfrastructure development plan under way, there is much at stake. Successfulimplementation of the amnesty plan would not only provide much needed succour,but also open up room for broader fiscal reform that would, in turn, lift the economy’scompetitiveness. Until we see evidence that the amnesty plan is successful,however, we are revising our 2016 budget deficit forecast to 2.6% of GDP (from 2.4%earlier), and are making no assumptions about an additional boost to state revenues.

　　Nevertheless, our fixed income strategist, Pin Ru Tan, recommends staying long 10yrIndoGBs. While she is equally cautious in her assessment of the tax amnestyscheme, she believes the timing and extent of the central bank’s monetary easing willdominate – we expect another 25bp policy rate cut in Indonesia in Q3 2016. The riskto her bullish stance is if the reform momentum stalls from here, which we expectwould push foreign investors to take profit on their existing government bondholdings.