Bumper bond auction fuels Indonesia amnesty hopes

From government officials to fund managers, Indonesia's great and good are becoming increasingly excited about the impact of the tax amnesty.

Indonesia’s tax amnesty is helping create bumper demand for government bond auctions, a government official told FinanceAsia on Tuesday. Investors and issuers are hoping the same thing will happen to corporate bonds.

Indonesia opened its latest auction for Islamic bonds on Tuesday, turning once again to a regular source of funding that gives it a quick gauge of liquidity in the domestic market. The response was overwhelming.

The government generated more than Rp17.5 trillion ($1.33 billion) of demand for the auction by around 1.30pm Jakarta time, said a government official. That allowed the government to raise Rp6 trillion, the biggest amount raised in such an auction this year and well above the indicative target of Rp4 trillion.

The official admitted he could not be certain how much of this demand was a result of funds being brought back into the country as a result of a tax amnesty bill passed in late June. But the money Indonesia’s wealthy are repatriating as a result of the amnesty — and the expectation they will keep doing so in ever greater numbers — is certainly helping demand.

“The yields are coming down because of these investors,” he said. “So far, the money has already had some impact. Some of this money is going to government bonds. Some is going to the stock exchange.”

Not all of the good news can be attributed to the amnesty. The government has had several highly-successful auctions already this year. The stock market is up roughly 20% since the start of 2015. A fund manager told FinanceAsia it has been “a fantastic year” in the bond market.

But there is hope that large inflows from the tax amnesty programme will tip the primary markets over the edge, making up for some quiet months in the equity capital market — and adding to a bond glut that, in terms of the number of deals, is already more than 50% above all of 2015.

“Even if you take the government’s lower target, it’s still a substantial amount that can come into the country,” said one fund manager in Jakarta. “It’s going to have an impact.”

Indonesia’s government reckons that the amnesty could bring back as much as Rp1 quadrillion ($76 billion) to the country, although the central bank thinks the figure will be closer to Rp560 trillion ($42.6 billion). 

Trickling in

Indonesian government officials floated the tax amnesty scheme in the middle of last year, trying to find a way to bolster weak tax collection amid a slowdown in economic growth. The idea was simple: allow Indonesian people and corporations to disclose offshore income without any legal risks. In turn, they would agree to pay tax on this income — but it would be much less than they would have paid had the money stayed in Indonesia.

There is still reason to doubt the tax amnesty will be the panacea the government is hoping for, however.

Since the tax rate on repatriated funds will start to increase from the 2% minimum at the end of September, analysts expect the bulk of the money to be repatriated within the next two months. By August 8, the government said Rp9.27 trillion ($705 million) had been declared — nowhere near the $42 billion the central bank projects for the full scheme.

The debt market has been quiet since the amnesty bill passed. There has not been a single new issue since the law was passed, according to Dealogic.

This may be because treasurers are waiting for the perfect time to tap the market. Several issuers have told local reporters they would be more likely to come to the bond market on the assumption that the amnesty would boost demand.

Bond investors say the year has already been a good one anyway. The $4.082 billion issued so far this year is already just $400 million shy of 2015’s total, according to Dealogic — although the rupiah has strengthened against the dollar since late last year.

The bond market has been helped by the announcement earlier this year that the government was planning to make pension and insurance funds keep 30% of their money in domestic government bonds, said the fund manager in Jakarta. But he is optimistic the tax amnesty plan, by boosting demand across all asset classes, will help make 2016 a year to remember in Indonesia's debt market.

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