Another funding shortfall is inadequate tax compliance. The Government’s tax amnesty program in 2016-2017 identified USD87 bn of such assets overseas,1,2 but our estimates of USD306 bn based on extrapolation of Global Financial Integrity Data suggest there is potentially another USD219 bn of undeclared assets abroad and more due from citizens who have not registered with the tax system. The success of Jokowi’s effort hinges on the government’s ability to bring the money back and widen the tax base.


President Joko Widodo’s administration from the beginning of his term identified infrastructure as the main theme for Indonesia’s economic development. Infrastructure spending increased by 65.6% in 2015 (the first year of Jokowi’s administration), while the budget allocation for infrastructure continues to mark growth until 2018, meaning that infrastructure remains the big-sized ticket for growth (Fig. 1). In addition, the government has also set an extensive target for infrastructure inside the National Medium-term Development Plan (RPJMN) in 2015-2019, including projects for connectivity (such as roads and tollroads, airports, and seaports), basic infrastructure, and water supply. During the three years to date of Jokowi’s administration (2015-2017), the government has built around seven new airports and 2600 km of new roads3, including 568km of toll roads, more than double the 212km of toll roads constructed in the previous 10 years.


Fig 1: Infrastructure spending continues to record growth but lags government projections



Despite being Southeast Asia’s biggest economy, Indonesia lags other countries in Foreign  Exchange Reserves, Money Supply, Bank Deposits, Insurance, Pension Plans, Mutual Funds and Tax Collection as a percentage of GDP. Several indicators showthat Indonesia ranked the lowest compared to peers in terms of financial asset accumulation as a percentage of its economic size (Fig. 2). On the positive side, this means there is a large potential ahead for growing financial participation, although Indonesia’s aging population and reduced birthrate is expected to lead to a nadir in the dependency ratio in 2030 at about 45%, which will then begin a gradual climb over the following decades and is expected to return to the current level at about 2040.


Fig 2: Lowest domestic financial assets to GDP



According to the World Bank, IFFs (illicit fund flows) reduce domestic resources and tax revenue needed to fund poverty-reducing programs and infrastructure in developing countries; accordingly, they are receiving growing attention as a key development challenge.

From discussions with several economists, we conclude that the low percentage of foreign exchange reserves compared to Indonesia’s GDP, especially in comparison to the peer countries, suggests ‘leakage’ of financial assets overseas.The regime of free foreign exchange transactions in Indonesia enables domestic financial assets to be kept offshore, while social tensions and past instances of political instability may have triggered the initial transfers of financial assets to safer havens.

To estimate the undeclared assets offshore,we use the Illicit Financial Flows data published by the Global Financial Integrity, which shows Indonesia in the top ten. Based on the report, Indonesia’s cumulative illicit financial outflows reached USD181 bn in 2013-2014 and averaged USD18 bn per year (Fig. 3)4. If we extend the cumulative illicit financial outflows to include the seventeen-year period from 2000-2016, then the amount of undeclared assets offshore is around USD306 bn or IDR4,070 tn. We note that the 2015 transfer of Standard Chartered’s Guernsey trust accounts to Singapore ahead of Guernsey’s adoption of the OECD common reporting standards involved 81 Indonesian entities with total assets of USD1.4 bn. This is just one offshore tax haven, and as Singapore won’t begin reporting until 2018, and is closer, it is likely to be a more popular destination for Indonesian money. Indeed, Singapore accounted for nearly half the overseas assets declared during the tax amnesty according to the Straits Times5.

Our own rough estimation using the average of the ratios of Philippines and Thailand for deposit, insurance, pension fund, and mutual fund investments as a percentage of GDP and compared to that for Indonesia would result in an amount of USD562 bn. Bear in mind that the illicit Financial Flows cumulative figure below of USD181 bn did not cover the period of Suharto-era money. What remains as a challenge is to find and repatriate the missing USD306 bn to USD562 bn for Indonesia to invest in its economy.


Fig 3: Illicit financial flows from the top ten source economies, 2013-2014 USD mn)



In fact, the government has made headway in identifying undeclared assets offshore through the amnesty program introduced in July 2016 to March 2017. Ultimately, the government hopes to establish a wider tax base that will generate a more sustained stream of revenue. Finance Minister Indrawati’s tax reform team aims to increase the tax ratio to 15 percent of GDP in 2020 from about 11 percent now. That compares with a global average of 14.8 percent in 2014, according to the World Bank6. Fifteen percent of Indonesia’s 2016 GDP is about USD140 bn. Only about 28 mn citizens are registered to pay taxes out of an adult population of 185 mn, which suggests rampant tax evasion.

The amnesty program offers dispensation for any taxes due, administrative sanctions, and tax criminal sanctions by declaring the assets both onshore and offshore by paying a low tax penalty. The program (Tax Office, Investor Daily 4 April 2017) ended with total asset declaration reaching IDR4,866 tn or 39% of GDP, which is the highest among countries which have recently implemented tax amnesty. However, the offshore declaration (both non-repatriated and repatriated) only reached a total of IDR1,178.8 tn or about USD87 bn, well under our low range estimate of what is stashed offshore. We conclude that Indonesian entities offshore are still hesitant to declare their assets, which we suspect may be due to continuing concerns about political instability as well as regulatory issues.


Fig 4: Indonesia’s estimated infrastructure funding needs per year – IDR1, 1tn



We estimate the government needs IDR5,500 tn (USD407 bn) to fund the infrastructure targets stipulated in the National Medium-term Development Plan (RPJMN) for 2015-2019, meaning that an average of at least IDR1,100 tn (USD81.4 bn) is required per year. Our estimate shows that there is a large gap between infrastructure funding requirements and the current funding which can be fulfilled with alternative financing such as capital markets and investor-based fundraising of around IDR204 tn per year (Fig.4). In other words, the government needs more private participation for infrastructure financing going forward which requires greater financial assets inside the country. Repatriation of domestic assets abroad is essential to fund government infra-spending. Not only can it help to sustain the infrastructure development targets, but also to strengthen the domestic financial structure and currency, since currency fluctuations may result from the movement of large rupiahdenominated assets outside of the country.


Ari Pitoyo

Chief Investment Officer
Eastspring Investments Indonesia


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