Global Business Guide Indonesia

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Business Updates | Indonesia’s 5th Economic Policy Package to Impact the Capital Market

The Indonesian government announced the latest in its series of economic stimulus packages on 22nd October 2015. Following on from the positive reception of the third and fourth packages (See Third Time’s A Charm – Indonesia Introduces Third Economic Policy Package and Indonesia Moves to Address Minimum Wage Woes), it is hoped that this next series of measures will have a similar effect by boosting investment and job creation. In this fifth economic policy package, the Indonesian Coordinating Minister for Economic Affairs stated that the latest package focused on three areas of deregulation, namely:

1. Asset Revaluation

The policy package measures obligate companies to revalue their assets in response to the fact that to date many Indonesian companies have not yet undertaken asset revaluation to reflect inflation or the depreciation of the rupiah. This asset revaluation measure is expected to help firms to bolster their financial performance through the book value of their asset depreciation and by calibrating to inflation. With this expected improvement in their financial data, it is hoped that this will provide companies with the financial foundations to undertake further business expansion. A further perceived benefit is that the tax cash flow burden will lighten following the revaluation process and thus recalculation of a given firm’s income tax obligations.

According to the Coordinating Minister for Economic Affairs, Darmin Nasution; "this policy provides tax relief incentives. Revaluation of assets will increase capacity, and financial performance will improve significantly. In the following years, it will yield greater profits".

Indonesian taxpayers (WP) who are eligible for the asset revaluation measures are companies and individuals that do bookkeeping in Indonesia; not limited to those recorded in rupiah but also those denominated in USD. At the time of filing a tax application in 2015, it may be based on the estimated value, and the completion of the assessment can be postponed until 31st December 2016. The same rules will apply for a 2016 tax application filing, with the completion of the assessment no later than 2017. The Indonesian tax authorities will give approval within 30 days once the file is received in full.

2. Eliminating double taxation for investment funds engaged in Real Estate, Property and Infrastructure

This particular measure relates specifically to investment products and the Indonesian capital market therefore its scope is still relatively limited given that the capitalisation of the Indonesia Stock Exchange remains comparatively small (See Indonesian Capital Markets – Local Funds in Prime Position). It is the shallowness of the capital markets which has prompted the development of products such as the Collective Investment Contract (KIK) for Infrastructure, KIK-Real Estate Investment Funds (KIK-DIRE) also known as Real Estate Investment Trust (REIT) and the like, which is in line with the goal of deepening Indonesia’s financial markets. To encourage the development of real estate fund investment products, the Indonesian government is also extending tax reductions, by eliminating the double taxation that is applied on transactions such as KIK-DIRE, KIK Asset Backed Securities (EBA) among others.

This policy is expected to attract funds that have been invested abroad (such as in markets with tax-haven policies) to Indonesia’s domestic market, in addition to encouraging investment in infrastructure and real estate. The projected impact of this tax facility is also that the increasing accumulation of the KIK fund may encourage the development of infrastructure and real estate projects (See High Stakes for Indonesia's New Infrastructure Push), as well as support the growth of construction services in Indonesia (See Construction Firms Find Strong Growth in Indonesia). Furthermore, the country’s coffers stand to benefit from the increased income of tax receipts from funds coming in to Indonesia from overseas and as a result of intensified business activities in the aforementioned sectors of the economy.

3. Deregulation in the field of Islamic (Shariah) Banking

Within the scope of the four previously issued economic policy packages, the Indonesian government had yet to address the potential of the country’s Islamic finance industry in realising longer term economic goals. Under the authority of the OJK, the government plans to stimulate the growth of the local shariah compliant finance industry (See Islamic Banking in Indonesia – A Giant Waking Up). The sector will thus be subject to deregulation designed to simplify the regulatory and licensing procedures for shariah banking and finance products. The licensing process will be streamlined to no longer require individual application for product issuance permission, but rather a formal standardised codification framework for Islamic finance products to adhere to.

"Only a report will be required," said Chairman of the OJK Board of Commissioners, Muliaman Hadad.

The deregulation also concerns other shariah finance products such as the practice of pawn broking by Islamic banks and financial institutions as gold remains the dominant saving method for many Indonesians.

In addition, the government is mulling providing easier market access for shariah banks in terms of opening new branch offices. It is hoped that this will encourage greater efficiency so that banking fees and interest rates can be made more affordable to customers.

The Stimulus Effect

Shortly after the announcement, the Indonesian stock market responded positively to the economic policy package. The Jakarta Composite Index jumped 1.49% and closed at 4,653. In addition, the property sector index increased by 3%, the second largest after the basic industry sector index which rose 3.12%.

Head of the Communication Division of Indonesia's Stock Exchange (IDX) Irmawati Amran said, on a weekly basis, JCI’s movement during the period encompassing the 19th October 2015 to the 23rd October 2015 has strengthened 2.90% to 4,653, from the previous week's closing level of 4,521 points.

"Foreign investors recorded a net buying in the stock market in the past five days with a value of 1.13 trillion IDR, although on an annual basis, the flow of funds from foreign investors still recorded a net sell of 10.01 trillion IDR," she said in an official statement.

Analyst from KDB Daewoo Securities, Dang Maulida said that a key point of Indonesia’s fifth policy package is geared towards companies revaluing their fixed assets, which many firms have reported as unchanged for years to avoid paying a 10% tax on the appreciation value. Maxi Liesyaputra, another analyst from KDB Daewoo Securities believes the tax relief measures will serve to stimulate the growth of DIRE, as an alternative vehicle for investment.

Local Owner Composition (in trillion rupiah)

Local Owner Composition (in trillion rupiah) 

Source: OJK, data as of 2nd October 2015

“The market suffered a heart attack. Foreign investors participated in morning selling. But suddenly, foreign investors went back to a buying position. In the afternoon, net buy in the regular market reached 450 billion IDR. Foreign investors came back aggressively into buying positions.” said Satrio Utomo on the stock trading after the  economic policy package anouncement.

Global Business Guide Indonesia - 29th October 2015

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