Indonesia Plans Policy Stimulus to Woo Investors And Help Rupiah

Indonesia plans policies on Friday

that may include a fiscal stimulus and tax holidays for

companies, as the country relies on investment to shore up a

current account deficit and flagging economic growth.

President Susilo Bambang Yudhoyono may announce the

stimulus and tax changes on Friday as part of a policy package

to address the economic situation, Firmanzah, a senior official

for economic affairs at the presidential office, told reporters

in Jakarta today. The government will also speed up a planned

revision of limits on foreign investment in certain industries,

Hatta Rajasa, the senior minister for the economy, said today,

without elaborating.

The government is seeking to take action as the rupiah has

fallen 4 percent this week and the stock market has slid 8.7

percent, after worse-than-expected economic data. Indonesia’s

current-account deficit widened to a record in the second

quarter, on weak demand for commodity exports and as foreign

direct investment grew at its slowest pace in three years.

“Tax holidays might interest some more investors but that

is not an overnight fix,” Keith Loveard, head of risk analysis

at Concord Consulting in Jakarta, said in an e-mail today.

“Nothing has been done during the good times to fix the

structural problems.”

Economic growth has held above four percent since Yudhoyono

came to power in 2004, and he gave a favorable assessment of his

record in a speech on Aug. 16. Expansion has slowed for the last

four quarters, dipping below 6 percent in the three months

through June for the first time since 2010. It will be difficult

to reach the government’s target of 6.3 percent this year,

Yudhoyono told reporters yesterday.

Share Buybacks

The government is coordinating its policies with the

private sector and the monetary authority, Rajasa said, after a

flurry of ministerial meetings to work on the package. Dealing

with the current-account deficit and stabilizing the rupiah were

two of the main priorities, he said.

The rupiah fell 0.4 percent to 10,818 per dollar today, the

lowest since April 2009. The central bank raised interest rates

by a total of 75 basis points in June and July to calm food and

fuel price pressures that drove inflation to a four-year high in

July.

The country needs aggressive monetary tightening such as

raising the central bank rate and reducing liquidity, otherwise

the selling pressure on the rupiah may continue, Irene Cheung, a

strategist at Australia New Zealand Banking Group Ltd. (ANZ) in
Singapore, said today in an interview. Bank Indonesia needs to

raise the policy rate by 50 basis points, Citigroup Inc. wrote

in note to clients yesterday.

The government may introduce policies to reduce the balance

of payment pressure, including incentives to boost exports and

investment inflows, Euben Paracuelles, an economist at Nomura

Holdings Inc, in Singapore, said in an interview today. It may

also signal increased spending on projects, while regulations to

allow state-owned companies to buy shares and help stabilize

bonds are likely, he said.

The government has already given state-owned firms the go-ahead to buy back shares, and some firms are seeking shareholder

approval to do so, Dahlan Iskan, the state enterprises minister,

told Bloomberg TV Indonesia today, without giving details on

firms. State-owned firms include PT Bank Mandiri (BMRI), the country’s

largest lender by assets, PT Telekomunikasi Indonesia (TLKM) and cement

maker PT Semen Indonesia. (SMGR)

“We’re studying whether we will buy back our shares,” Dwi Soetjipto, the president director of Semen Indonesia, told

reporters on Aug. 21. “We still don’t understand why everyone

is panicking on the financial situation.”

To contact the reporters on this story:

Agus Suhana in Jakarta at

asuhana1@bloomberg.net;

Neil Chatterjee in Jakarta at

nchatterjee1@bloomberg.net

To contact the editor responsible for this story:

Stephanie Phang at

sphang@bloomberg.net

Indonesia Plans Policy Stimulus to Woo Investors And Help Rupiah