Indonesia's fiscal outlook benign but authorities hawkish: Citi

In Citi Research's Indonesia Economics View report dated Oct 21, economist Helmi Arman shared his takeaways from the Jakarta Macro Meetings on Oct 18.

The fiscal deficit stood at 1.35 per cent of gross domestic product (GDP) as of end-September, down from 2 per cent in the year-ago period. Indonesia's Ministry of Finance has lowered its projection for the FY 2018 fiscal deficit to 1.8 per cent to 2 per cent of gross domestic product, down from 2.1 per cent previously. Said Citi: "We think this forecast looks credible, given the still-robust growth of tax revenues up to Sep (18% YoY) as result of fiscal reforms. MoF still sees continued room for tax intensification next year."

However, policymakers seem to envision fuel prices being raised across the board after the April 2019 elections, though not to their full market price -- in contrast to Citi's base case of price increases for RON 88 and 90 only, but to their full prices. Under the policymakers' scenario, inflation is expected to rise towards the low 4 per cent level in 2019.

Noting that the central bank acknowledged a need to be seen as credible in light of Indonesia's widening current account deficit in the third quarter, Citi said it takes this "as a hint that another policy rate hike is coming".

On withholding taxes on fixed-income securities, the focus for now seems to be on lowering the tax rate for domestic investors, as changing the tax rate for foreign investors would require a change in law rather than regulations. "This should not be expected anytime soon, as parliamentary deliberations for a given bill could take years to be tabled and concluded," noted Citi.

Finally, in the upcoming elections, a second term "remains probable" but tail risks could arise from blunders and changes in campaign funding dynamics, said Citi. "Past surveys have shown that over 1/3rd of voters are 'logical' voters as opposed to die-hard loyalists & opposers. Thus any narrowing of the incumbent's lead to less than 10pps could be a vulnerability against the risk of being overturned."