Rupiah drops 1% after Indonesian president limits VAT hike plan to broad, sector-specific hikes; experts warn it could erode government's credibility in markets
On January 2, 2568, Bloomberg News reported that The rupiah fell almost 1%. After Indonesian President Prabowo Subianto made a surprise decision to change his tax hike plan, it surprised the market. This has led the Ministry of Finance to take action to reassure the market about the country's fiscal stability.
Ms. Sri Mulyani Indrawati, Minister of Finance of Indonesia Speaking at the opening ceremony of the 2568 annual stock trading, he said that the recovery in revenue in the second half of the year had significantly improved the financial outlook, and that the 2567 budget deficit was expected to end much lower than initially estimated, despite increased government spending.
“This is a very extraordinary result and is much lower than the 2.7% deficit we projected in our first-half report. This suggests that our 2567 budget will close in a relatively good and secure position, providing a strong foundation for 2568.” Ms. Indrawati said
Indrawati's remarks come after Subianto announced on Dec. 31 that he would cap overall value-added tax (VAT) increases at 11% and only increase them to 12% for luxury items such as private jets and yachts.
The decision sent the rupiah down nearly 1 percent to 16,259 to the US dollar, before recovering slightly to 16,230 to the dollar.
The rupiah was the most actively traded among Asian currencies on Thursday (Jan 2), even as yields on Indonesian five- and 5-year government bonds remained relatively steady.
Mr. Lionel Priyadi, Macro Strategist at PT Mega Capital Indonesia He said that while the overall VAT cancellation would benefit the country’s gross domestic product (GDP) growth and inflation, the partial adjustment would still make the government look inconsistent and unscrupulous among investors, which raised concerns about regulatory uncertainty and fiscal risks.
Mr. Muhammad Misbakun, Chairman of the Parliamentary Committee on Financial Affairs The comprehensive VAT hike was originally expected to generate around 75 trillion rupiah ($4.6 billion), but the hike is now expected to generate only 3.2 trillion rupiah.
Subianto's decision also comes amid a slowdown in Indonesia's economy, which grew at its slowest pace in a year in the third quarter of 3 due to weak consumer spending and manufacturing job losses. The headline inflation rate in 2567 fell to a record low of 1.57%, reflecting a slowdown in spending activity, and business and labor groups warned that a VAT hike could further erode the country's dynamism.
The government also faces a challenging balance, as VAT revenue accounts for about 25% of total tax revenue.
Indrawati stressed that the Indonesian government remains committed to measures aimed at accelerating economic growth, including mitigating the potential impact of the initially proposed value-added tax hike. She also stressed that the budget deficit forecast for 2568 is expected to be 2.53% of GDP, below the statutory ceiling of 3%.
Alan Lau, foreign exchange strategist at Malayan Banking Bhd in Singapore He said that while the move initially had a negative impact, it was important to remember that the VAT hike was not included in the 2568 state budget estimates and that the rupiah’s depreciation could reflect reduced liquidity in the market as trading activities resume after the New Year holiday.
refer : bloomberg.com
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