27 October 2016

Resilience in Safeguarding Economic Growth

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Indonesia’s current economic situation is yet to recover from the global economic downturn. However, despite the moderate economic growth with the projection of 2017 remains at 5.3%, some indicators begin to show improving signs. The forecasted GDP of 2016 has been updated to 5.0% from the previous forecast of 4.7%. Furthermore, the trade balance as of June 2016 has reached the amount of USD 900.2 million; far exceeding the same period of 2015 with USD 536 million.

The latest updates on the Indonesian economy was the main focus during the recent HSBC gathering with several Chinese businessmen and investors in Jakarta. Indonesia is a vital market to Chinese businesspeople in both the bilateral investment relationships and in the context of ASEAN. The Indonesian market opens vast investment opportunities to Chinese investors despite several challenges that remain to be dealt with.

The moderate but stable economic growth was primarily supported by a series of Bank Indonesia (BI) measures in interest rates and reserve requirement cuts. Throughout the year, BI has undertaken the reserve requirement cuts twice totaling 150bps down to 6.50%. Meanwhile, interest rates have undergone three cuts during the 1st quarter of 2016; all of which were 25bps down to the current rate of 6.75%. The current rate may undergo further cut of 25bps down to 6.50% at the end of the year in order to sustain the moderate growth rate and the push for infrastructure development.

Another significant development is BI’s plan to implement the “7-Day Reverse Repo Rate” starting from 19 August 2016 as a benchmark of interest rate policies. The implementation of Reverse Repo is expected to have a positive impact towards the interest rate reduction for savings and loans and the increase in banking liquidity. Such increase in liquidity would ultimately encourage credit disbursement with competitive interest rates and sustain the domestic economic growth. However, this important shift in policy is predicted to receive cautious welcome from the market players and investors as they are beginning to fully comprehend the change.

Apart from BI’s financial policy series, the government has launched the Tax Amnesty program for Indonesian citizens who invest their funds overseas to repatriate such funds to Indonesia with relatively low penalties. Through this policy that has been implemented since 18 July 2016, the government pushes to obtain tax revenue of IDR 1,500 trillion (USD 109.5 billion) this year in accordance with the revised state budget of 2016. Despite the doubts that such Tax Amnesty revenue may not reach its target, the government remains optimistic that the realization of this program will meet the expectations and will sustain even higher growth rate in 2017.

The Tax Amnesty program is expected to yield the revenue of IDR 53 trillion for the government during its first few months of implementation, and the positive impact may be felt as early as August-September this year. However, the program is not expected to have an immediate significant impact towards the economic growth as the capital owners will lean towards the financial market investment before stepping into the real market at a later date. Therefore, the positive impact of the Tax Amnesty program may only be truly felt next year.

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