Indonesia weighs tax cut for bond investors to prop up currency

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Mr Warjiyo says that Indonesia must raise interest rates ahead of the US Federal Reserve to avoid 'drastic' capital outflows.
OCTOBER 04, 2018 - 11:51 AM

Jakarta

INDONESIA is weighing proposals to cut the levy on gains from its sovereign bonds and extend tax breaks to exporters who will park their dollar earnings in local banks for a longer period as part of measures to shore up a weakening currency.

Lower bond taxes could attract more inflows and help "deepen domestic financial markets", Robert Pakpahan, director general of taxes, said in an interview in Jakarta.

Officials are also tweaking rules to grant exporters a tax break on foreign-exchange deposits beyond six months, he said. Foreign investors, except those from jurisdictions with tax treaties with Indonesia, currently pay a 20 per cent tax on Indonesian bonds, while locals are taxed at 15 per cent. There is no decision yet on the magnitude of the reduction, Mr Pakpahan said on Sept 28.

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The proposals are the latest in a series of steps by policymakers to bolster the rupiah, which weakened past 15,000 per dollar for the first time in 20 years on Tuesday.

Inflows such as those into stocks and bonds have become more crucial in boosting the supply of dollars as the central bank drains its reserves to slow the currency's slide.

Indonesia is among the hardest hit by the emerging-market selloff this year, with the currency losing about 10 per cent. Foreign inflows into its bonds stood at a paltry US$832 million in the nine months through September, compared with US$11.5 billion a year earlier, data compiled by Bloomberg show.

Foreign investors have trimmed their holding of rupiah bonds from a record 41.5 per cent in January to about 37 per cent. The yield on benchmark 10-year bonds has risen 192 basis points this year.

Since early 2016, the government has provided tax exemption for exporters depositing earnings in local banks for a certain period. Still, not many made use of the facility as the incentives ended with the rollover of the proceeds into a new deposit, Mr Pakpahan said. "That's why we are trying to fix that rollover requirement now," he said. "When the exporters roll over their foreign-exchange earnings, they will still get the incentives." The new rule will soon take effect.

In a boost to the government's efforts to stabilise the currency, exporters have also pledged to convert about 40 per cent of their revenue to the rupiah, according to Rosan P Roeslani, chairman of the Indonesian Chamber of Commerce and Industry.

While exporters repatriated more than 90 per cent of their earnings in the second quarter, only 14 per cent of that was converted into rupiah, according to data from the central bank.

"After a series of discussions with the government, Bank Indonesia and the Financial Service Authority, we have committed to convert about 40 per cent of the repatriated earnings into the rupiah," Mr Roeslani said on Monday. "This new rollover policy will help to realise such a target."

Separately, Bank Indonesia governor Perry Warjiyo said on Wednesday that Indonesia must raise interest rates ahead of the US Federal Reserve to avoid "drastic" capital outflows. The comments appear to open the door for another Indonesian rate rise before mid-December, when the Fed is expected to increase US rates for the fourth time this year.

"We have to act first so that the capital reversals will not be drastic," Mr Perry told a seminar organised by Indonesian political party Golkar.

Bank Indonesia (BI) has raised interest rates five times since mid-May by a total of 150 basis points and intervened in the currency market to help the rupiah and reduce volatility.

"I don't like raising rates, but if the outflows are this heavy, then we must do it," he said, adding that higher interest rates would also work to reduce Indonesia's current account deficit.

Higher interest rates and a weaker exchange rate could affect domestic demand for imported goods, which would reduce the current account gap. The government has raised import tariffs, widened biodiesel use and delayed billions of dollars of infrastructure projects to cut import bills.

In the second quarter, Indonesia's current account deficit was its widest in nearly four years, at 3 per cent of gross domestic product.

The deficit was 1.7 per cent of GDP in 2017. BI has forecast the gap to rise to somewhere below 3 per cent this year, then narrow to about 2.5 per cent in 2019.

Pressure on the rupiah may ease next year because of the smaller deficit and fewer US rates increases, Mr Perry said. BLOOMBERG, REUTERS