Government sixth stimulus : Incentives For Special Economic Zones

Incentives For Special Economic Zones

The Government continues to push through with its policy packages by launching its sixth stimulus, which mainly consists of three main policies. In our view, the stimulus given for Special Economic Zones (SEZ), which includes tax holidays up to 25 years, continues to highlight the Government’s determination to further attract investment into Indonesia.

• Tax incentive for SEZ. Currently, there are eight SEZ in Indonesia that are sector specific ie each one is based in an area of its primary resources ranging from tourism, mining and fisheries to logistic and international port. In the sixth policy stimulus, the government would provide tax holidays in order to further garner more investment into SEZ. For investments > IDR1trn, the government is expected to provide tax holidays that range between 20-100% for 10-25 years, while for investment between IDR500bn to 1trn would get similar tax holidays for 5-15 years. If the investment is not within the sector specific, the Government would still provide tax allowance of 30% for six years. All of tax incentives are in addition to the current incentives in SEZ such as the exemption on import tax, value-added tax (VAT) and luxury tax. The government is also planning to allow foreigners to purchase landed property in these locations. Overall, we believe that the new incentive increases the attractiveness on investments into Indonesia. 

• Water supply regulatory change. The Government would also amend the water supply regulation, which would subsequently be considered as a public service. This would result in all the water supply businesses and authority going back to the Government. While this appears to contradict attracting new investments, these changes are necessary to comply with the recent verdict of the Constitutional Court. However, the Government has assured private companies with existing water treatment licenses that they could still continue with their businesses until the new regulation is formalised. Nonetheless, there is still a risk for more restrictive regulations going forward, which could negatively impact the ready-to-drink businesses of consumer companies such as Indofood CBP (ICBP IJ, BUY, TP: IDR16,300) and Unilever (UNVR IJ, NR). 

• Further, streamline in bureaucracy. In the continuation of the first deregulation policy, the Government is expected to further streamline the importation process for drugs and its raw material to be less than 1 hour. This would positively impact pharmaceutical companies and hospitals sectors such as Kalbe Farma (KLBF IJ, NR), Mitra Keluarga (MIKA IJ, BUY, TP: IDR3,150), and Sarana Meditama (SAME IJ, BUY, TP: IDR3,300). 

• The winner of the sixth stimulus policy would be Kawasan Industri Jababeka (KIJA IJ, NR), which currently has two projects in SEZ – Tanjung Lesung (Banten) and Morotai (North Maluku) – with a combined total development area of 2,647ha (gross). KIJA has signed a memorandum of understanding (MOU) with seven investors (three local and four foreign companies) to develop the Tanjung Lesung SEZ earlier this year. Meanwhile, the company has also partnered with some 20 Taiwanese investors to develop Morotai with an estimated development cost of up to IDR6.8trn covering an area of 1,200ha. 

• We also see the progression of the Government’s support to further develop the SEZ by resolving their inadequate infrastructure. Based on data from Ministry of Public Works, infrastructure plans in the eight SEZ locations have been tendered and signed in 2015, except for Tanjung Lesung. Nonetheless, the Government has committed to build a connecting toll road from Jakarta-Merak to Tanjung Lesung. Work on the 80km stretch of road, which expected to be completed within three years of the tender, should start next year. 

• 3Q15 GDP is below expectation. The Central Bureau of Statistic released 3Q15 GDP which saw slight growth improvement to 4.73% vs 4.67% in 2Q15 and 4.72% in 1Q15. However, the figure was below both Central bank expectation of 4.85% and consensus’ 4.80%, and continues to highlight the slow pace of economic improvement. We would expect for a stronger stimulus from the Government, especially on measures to propel economic activity in the short- to medium-term. The Government is now running at higher risk of a budget deficit, especially as tax collection still fell short of its target, reaching only 57% up to mid-Oct. With government spending likely to intensify in the 4Q15, the risk of a further budget deficit expansion is increasing. As such, it is likely that the Government might not be able to fully meet its initial spending target, but we opine that the situation has rather been expected, especially with slower progress earlier this year. What is more important, in our view, is for a visible improvement in spending pattern in 4Q15, that is more critical and can improve confidence of the Government in realising infrastructure development going forward. Our economist envisages the Indonesian economy to grow at 4.9% YoY in 2H15, faster than 4.7% YoY in the 1H. This is on the assumption of strong government spending and strong investments. For the full year, we maintain our real GDP forecast and expect a more moderate pace of growth of 4.8% in 2015, compared with 5% in 2014.

Source : RHB OSK Indonesia Research Institute

Author : Unknown

Share this

Related Posts