Indonesia’s Tax Amnesty Could Boost Corporate Bond Market, According to Reuters

By Fransiska Nangoy

JAKARTA (Reuters) – Indonesian companies are gearing up to enter the debt markets, anticipating a surge in investor interest due to the repatriation of offshore wealth generated by the new tax amnesty. This influx of funds is expected to lower borrowing costs for businesses, particularly in corporate bonds.

Firms such as construction giants PT Adhi Karya Tbk and PT Waskita Karya Tbk are preparing bond issuances to take advantage of the billions of dollars that the government expects to bring back by March 2017.

“The tax amnesty, along with repatriated funds, will undoubtedly improve liquidity. With better liquidity, we can expect lower coupon rates,” commented M Choliq, president director of Waskita.

Waskita aims for a coupon rate of approximately 8.5 percent on its planned bond issue of up to 20 trillion rupiah ($1.52 billion), which is a reduction from the 9.25 percent rate set for its previous 2 trillion rupiah issuance last month.

PT Pelabuhan Indonesia III, a port operator that recently obtained a 4.5 trillion rupiah syndicated loan, also plans to launch 5 trillion rupiah in bonds in early 2024, according to president director Orias Petrus Moedak.

Simultaneously, Adhi Karya is looking to expedite its bond issuance before the March cut-off for the tax amnesty to capitalize on the anticipated rise in investment interest, according to corporate secretary Ki Syahgolang Permata.

The government initiated the tax amnesty program last month, allowing Indonesians to declare and repatriate untaxed assets at reduced tax rates. These repatriated assets will be subject to a three-year lock-up period and can be invested in government-approved instruments, including corporate bonds, local stocks, and real estate.

“This tax amnesty is opportune for corporations looking to issue bonds,” remarked Boumediene Sihombing, an investment banker with Danareksa in Jakarta. He highlighted that historically low inflation rates could create room for future central bank interest rate cuts, contributing to a favorable environment for companies due to improving market confidence, economic growth, and government spending.

As of June 3, approximately 35.3 trillion rupiah ($2.69 billion) had been raised by 15 companies in Indonesia’s corporate bond market during the year, a significant increase from the 23.4 trillion rupiah raised in the same period the previous year.

In a market of declining interest rates, corporate bonds are increasingly perceived as an attractive investment, according to Wahyu Trenggono, director at the Indonesia Bond Pricing Agency. “Even though interest rates may not be as high as earlier this year, corporate bonds continue to present appealing returns compared to government bonds,” he noted.

Following the commencement of the tax amnesty, the yield on the benchmark 10-year Indonesian government bond has decreased to 6.90 percent, down from around 7.7 percent prior to the bill’s passage in late June.

The anticipated influx of new corporate bonds could further enhance liquidity in the secondary corporate bond market, which currently sees an average daily trading volume of less than 1 trillion rupiah, in contrast to the 10-14 trillion rupiah average seen in the government bond market. Typically, existing investors buy bonds and hold them until maturity.

While the tax amnesty could revitalize vital segments of Indonesia’s financial landscape, its rollout may encounter challenges. Legal activists have brought the amnesty before Indonesia’s Constitutional Court for a judicial review, arguing that it provides protection for those involved in money laundering and tax evasion. The court has granted the activists until August 9 to submit a revised petition.