Indonesia's top fund likes bonds more than stocks on tax amnesty

[JAKARTA] Indonesia's planned tax amnesty, aimed at luring back billions of dollars stashed abroad, will boost bonds more than stocks, the nation's top fund manager says.

PT Manulife Aset Manajemen Indonesia sees the tax plan lifting government revenue and supporting the country's case for a full investment-grade rank after S&P Global Ratings maintained its junk status, said Chief Investment Officer Alvin Pattisahusiwa.

The manager of the Manulife Dana Tetap Utamafund, whose one-year gain of 14.3 per cent was the best among those with assets of US$100 million or more, said the lowest inflation in more than six years also boosts the appeal of Asia's best- performing sovereign debt.

"We prefer bonds, then stocks, over cash," Mr Alvin said in an interview in Jakarta. "The tax amnesty will solve a number of problems at the same time. It will address revenue, assure S&P of fiscal reform, add liquidity to local markets and boost demand for bonds as there may be incentives for investing repatriated funds in bonds."

Rupiah-denominated notes have gained more than 11 per cent in 2016, the most in Asia, as foreign investors pumped US$4.9 billion into Indonesian debt.

President Joko Widodo is asking lawmakers to approve the tax amnesty bill that central bank estimates will result in the repatriation of about 560 trillion rupiah (S$56.8 billion) of undeclared income. Mr Alvin said a chunk of this money is also likely be invested in real estate, boosting shares of property developers.

The yield on Indonesia's 10-year notes fell four basis points Wednesday, and has dropped 111 basis points this year, to 7.64 per cent.

The local unit of Manulife Financial Corp.'s predicts it will reach 7 per cent this year, a level last seen in October 2013. After adjusting for inflation, the Indonesian securities offer the highest yield in Southeast Asia.

The nation's currency has strengthened 4.2 per cent against the dollar in 2016, and the Jakarta Composite Index of shares is up 7.1 per cent.

Mr Alvin still expects a 10 per cent to 12 per cent return from Indonesia's stock market this year, a rebound from the 12 per cent drop in 2015, as consumer spending recovers from a weak first quarter.

Telecommunication companies will benefit from a rise in the number of Indonesians accessing the internet and social media through their cellular phones, while property and infrastructure stocks will also outperform., he said.

AMNESTY BILL

Under the draft amnesty bill, a 2 per cent to 6 per cent tax rate will be paid on declared assets and this will drop to 1 per cent to 3 per cent if the money is brought back from offshore. The reprieve, which will apply to company and personal taxes, will last six months. It's likely to be implemented in July, Soepriyatno, the deputy chairman of the house's financial commission, told the Detik website May 26.

Bank Indonesia estimates the amnesty, which is aimed at plugging a hole in the government's budget to fund infrastructure development, will boost 2016 economic growth by 0.3 percentage point to as much as 5.4 per cent. That compares with a six-year low of 4.79 per cent in 2015. Only 27 million Indonesians are registered taxpayers and less than a million of them paid what they owed in 2014.

"Indonesia remains on track to a very positive future," Mr Alvin said. The country's demographics and relatively large economy mean "Indonesia's potential is massive, if well managed," he said.

BLOOMBERG