Indonesia: 3M18 fiscal realisation

HIGHLIGHTS

3M18 fiscal realisation

• Indonesia’s fiscal deficit was lower yoy at -0.58% of GDP in 3M18, boosted by higher tax and non-tax revenue collection.
• Greater tax compliance raised non-O&G income tax revenue whereas improving consumption and investment drove VAT and import duties higher.
• Rising oil prices lifted both O&G revenue (+26% yoy) and subsidy spending (+105% yoy). O&G fiscal balance recorded a surplus of Rp14tr in 3M18 (vs. Rp19tr in 3M17).
• We maintain our GDP growth forecast at 5.3% yoy for 2018.

Fiscal deficit at -0.58% of GDP in 3M18
Indonesia posted a fiscal deficit of Rp86tr, or -0.58% of GDP, in 3M18, lower than Rp104tr, or -0.76% of GDP in 3M17. The improvement was driven by higher tax (+10% yoy) and non-tax (+22% yoy) revenue collection. Comparatively, overall government expenditure growth was more restrained at 4.9% yoy over the same period.

Tax revenue lifted by greater tax compliance and domestic demand
A better formal compliance ratio (64% in 3M18 vs. 59% in 3M17) has resulted in higher personal income tax collection (+16% yoy in 3M18 vs. +8% yoy in 3M17). Improvements in consumption and investment were evident from higher VAT (+15% yoy; 18% of APBN 2018) and import duties (+10% yoy; 24% of APBN 2018). Higher cigarette excise taxes lifted excise tax revenue (+16% yoy; 5% of APBN 2018).

Higher commodity prices raised non-tax revenue…
A conservative oil price assumption of US$48 per barrel under the state budget provided upside to O&G revenue collection as the realised Indonesian Crude Price (ICP) in 3M18 was 31% higher at US$63 per barrel. 39% of the non-tax revenue was contributed by O&G receipts (+43% yoy to Rp28tr; 35% of APBN 2018) whereas higher coal prices lifted mining receipts (+21% yoy to Rp7tr; 39% of APBN 2018).

… as well as subsidy spending
The downside from rising oil and coal prices was higher subsidy expenditure amid the government’s decision to maintain subsidised energy prices. The government spent Rp16tr in fuel subsidies in 3M18 (33% of APBN 2018), the majority of which we believe went to LPG subsidies given its variable subsidy mechanism. Rp10tr was disbursed as electricity subsidies in 3M18 (20% of APBN 2018).

Fiscal reforms and prudent policy credited for rating upgrades
A lower fiscal deficit as a share of GDP in 3M18 (vs. 3M17/16) reflects the government’s commitment to fiscal prudence. This, together with improving external balances, was rewarded with rating upgrades by international rating agencies. The upgrade to Indonesia’s sovereign rating by Moody’s last Friday (to Baa2) represents the third upgrade within a year, after similar moves by S&P in May 2017 and Fitch in Dec 2017.

Reiterate our 2018 GDP growth forecast of 5.3%
Despite increasing yoy, 3M18 tax revenue accounted for 16% of APBN 2018, still lower than the average of 19% realised in the past four years (Fig 7), suggesting more efforts are still needed to meet the state budget target. Government revenue has missed the target in the past six years. We nonetheless take note of positive developments, such as greater tax compliance after the tax amnesty programme, the implementation of electronic submissions as well as the tax authority’s plans to adopt new technology, which could boost efficiency and tax-to-GDP ratio gradually. Positively, higher non-tax revenue, which will likely exceed the government’s target, may provide some cushion against the negative fiscal impact of a higher subsidy bill (especially on LPG). We maintain our 2018 GDP growth forecast at 5.3% yoy.

Tax revenue grew 10% yoy in 3M18, supported by non-O&G income tax, VAT, excise tax and international tax. Greater compliance post-tax amnesty programme (Sep 2016-Mar 2017) lifted personal income tax revenue (part of non-O&G income tax). Higher VAT and import duties were supported by domestic demand. Excise tax revenue was mainly contributed by higher tobacco tax (+18% yoy to Rp7tr), as the effective cigarette excise tax rate was higher at 11.68% in 3M18 (vs. 9.8% in 3M17).

Higher non-tax revenue was driven primarily by receipts from natural resources, on the back of stronger commodity prices.​

Higher social disbursement and subsidy spending lifted central government expenditure in 3M18. With unchanged fuel and electricity prices in a rising oil price environment, spending on energy subsidy was higher. The fuel subsidy amounted to Rp16tr (33% of APBN 2018) while the electricity subsidy amounted to Rp10tr (20% of APBN 2018). Greater social spending was driven by conditional cash assistance to poor households (Programme Keluarga Harapan, PKH).

Originally published by CIMB Research and Economics on 19 April 2018.