[JAKARTA] As Indonesia's tax amnesty delivers only a fraction of the hoped-for revenue, a dose of reality is worsening the nation's growth outlook and eroding this year's stocks rally.
Infrastructure and real estate companies, which had been expected to benefit the most from a boost to the budget and inflows of repatriated funds, are faring the worst. As it nears the end of its first trimester, the nine-month amnesty has generated 18 per cent of targeted tax revenue and the central bank has forecast the reprieve will achieve just 11 per cent of the income the government was expecting from it this year.
"The weak tax amnesty program has contributed to the drop in the Jakarta Composite Index," said Jemmy Paul, an investment director at PT Sucorinvest Asset Management in Jakarta. "Infrastructure-related stocks are the most affected by the negative sentiment from the weak tax amnesty flows, especially after the government announced the spending cuts."
It had been hoped that the amnesty would plug a budget hole that led to Finance Minister Sri Mulyani Indrawati cutting spending and transfers to regions by 133.6 trillion rupiah (S$13.9 billion) last month. That's delayed the building of roads, ports and rail and dimmed the prospect that last quarter's pickup in economic growth can be sustained.
The government will now probably have to reduce outlays further or widen the deficit due to "well below target" returns from the amnesty, said David Sumual, chief economist at PT Bank Central Asia.
"I think it will affect growth, and especially the importation of capital goods and raw materials," he said in Jakarta, adding that a disappointing amnesty would probably shave around 0.1 percentage point from gross domestic product growth this year.
A gauge of Indonesian infrastructure stocks climbed 14 per cent from June 28, the day the amnesty bill was passed, to this year's highest close on Aug 1 before falling 11 per cent through Monday. A measure of property shares rose 10 per cent through Aug 11 and has dropped 6.2 per cent since then.
PT Lippo Karawaci, a property developer, and PT Wijaya Karya Beton, which supplies precast concrete structures, are among the worst hit equities, losing 14 per cent and 13 per cent, respectively, from highs in July and August.
The government had derived 29.1 trillion rupiah of tax revenue from the amnesty through Friday, official figures show, compared with a target of 165 trillion over the whole reprieve. The results are more underwhelming than they look as strong returns were expected in the first three months when the penalty rates are the lowest.
Just 35.6 trillion rupiah of declared income has been repatriated, a fraction of the central bank's May forecast of 560 trillion rupiah.
The Jakarta Composite Index has fallen 2.8 per cent to 5,305.108 from this year's highest close on Aug 18 amid high valuations and a broader selloff in emerging markets.
The gauge's price-to-earnings ratio rose to 18 times in early August before declining to 17.4 on Monday. The index could drop to as low as 5,000, said Sucorinvest's Mr Paul.
"Some investors might be disappointed with the lower-than- expected tax amnesty realisation, both in the total wealth being declared and the revenue from the penalty fees," said Jeffrosenberg Tan, director for investment strategy at PT Sinarmas Sekuritas in Jakarta. "Banking stocks will be more vulnerable as the GDP growth will affect their performance."
The Jakarta Finance Index surged 18 per cent from June 28, when the amnesty bill was passed, to this year's closing high on Aug 8 and has lost 2.2 per cent since then. South-east Asia's largest economy beat estimates to grow 5.18 per cent in the second quarter from a year earlier, the fastest pace since the end of 2013, driven by a 36 per cent surge in government spending from the previous three months.
A disappointing amnesty will raise the chance that more tax scrutiny next year might hold back a private-sector recovery, Sean Gardiner, a managing director at Morgan Stanley in Singapore, said in a research note this month in which he advised clients to take profits in Indonesian stocks.
Sinarmas's Mr Tan expects further declines in Jakarta stocks and says this will present a buying opportunity. Some property and automotive companies will become attractive as well as state-owned builders because infrastructure development remains a priority for President Joko Widodo, he said.
Sucorinvest's Mr Paul is forecasting a rebound in the JCI to 6,000 to 6,200 over the next 12 months driven by a recovery in company earnings and a plan to cut corporate taxes to 20 per cent from 25 per cent.
While the inflows and tax revenue from the amnesty have so far trailed well behind government forecasts, many investors didn't regard those estimates as realistic, said Mixo Das, a Singapore-based strategist at Nomura Holdings Inc.
"I think the current pace of declaration has been somewhat slower than market expectations, but not a lot," he said.
"I would be more focused on growth in the third quarter. If growth doesn't pick up, then we anticipate more correction."