Indonesia Strategy - Minister of Finance meeting KTA - Deutsche Bank

Last Friday, Minister of Finance Pak Agus held his first analyst meeting, which lasted well into the night. The discussion touched on issues such as the fiscal budget, fuel subsidy, land reform bill, CPO tax, rupiah, and financial body supervision, and the minister also articulated his readiness to resign if the government’s Newmont NNT acquisition fails.

First, we make some general observations. For someone who is under intense pressure from parliament on the Newmont deal, Pak Agus was remarkably relaxed. He reiterated that he would resign if the government acquisition of Newmont fails, sending an unmistakable message to parliament and the government leadership; his motive for wider good in Indonesia was also convincingly articulated. His detailed explanation of the budget also displayed his knowledge; areas of weakness were "exposed" when immediate solutions weren't readily available, but in some ways this was reassuring. He also lined up the MoF's entire directorate general. Among them was the recently installed head of taxation, who has been tasked with overhauling the corruption-ridden institution and is also the youngest-ever head of custom and duties. Each outlined a clear and sensible agenda.

Budget – Revenue
Tax revenue is the "controllable" part of the budget; a lion share of the revenue is directly under the MoF. YTD April reached Rp331tr or 30% of FY11, ahead of runrate. The c. 20% increase is actually higher than most listed corporates in spite of the much larger revenue base. Taking seasonality into account, the budget is actually ahead: past five years YTD April revenue was 24%. Yet there is still much room to grow, considering the reforms under way and the rampant smuggling and
tax evasion given the still low tax yield (11-12%)

Budget – Expenditure
This is the "uncontrollable" part of the budget. While the MoF should help to make the procurement process less rigid, actual spending lies in the hands of the assigned ministries, e.g. public works for infrastructure, etc. The theme here is simple: areas that needed spending saw underspending (i.e. infrastructure); but areas that didn’t need spending saw overspending (i.e., fuel subsidy). Pak Agus exposed the area where underspending was worst: capex (including infra), a mere 6.8% of FY11 (8.2% at the same time last year). Expenditure was Rp280tr or 23% of FY11 (vs 20% in the same period last year).