D

irector general of taxation Fuad Rahmany confirmed last week that the impact of weakening economies in Europe and the US on Indonesia had been much more severe this year than last.

As the senior official overseeing tax collection, Rahmany’s observation is certainly candid as he can immediately detect the real impact from the latest data on tax receipts that his office collects from corporate taxpayers.

Last year (as of Dec. 18), income tax receipts still increased by almost 20 percent. But tax receipts in the same period this year rose only by about 9 percent. This means the impact of the global economic slump in Indonesia has not been so severe because its trade ties with Europe and the US are not so deep.

However, as weakening economies in Europe and the US severely hit Indonesia’s major trading partners — China, India, Singapore, Japan and South Korea — last year, the impact became more damaging. Economists called this phenomenon the “second-round impact”.

The tax director general said it would be impossible for his office to meet its tax receipt target of Rp 885 trillion (US$92 billion) this year. The most he could achieve would likely be 95 percent of the target.

The tax receipt data also shows that the most affected sectors are the mining industries, including oil and gas, as they have been hit by the cascading impact of the fall in both prices and in the volume of demand caused by the global economic slowdown.

As a major exporter of natural resource commodities, the impact can also be seen in the external trade balance that for the first 10 months of this year saw a total deficit of $500 million, compared to a cumulative surplus of $26 billion in the same period last year. No wonder many analysts, including those in the World Bank, foresee Indonesia’s economy to expand by only about 6 percent this year, slightly lower than the government projection of 6.3 percent.

As uncertainties over the international outlook remain and there are material risks of more negative external shocks buffeting the economy, the government should stay alert against any worsening impact, including a severe fiscal drag or a shock to private sector confidence in the US and a re-intensification of the eurozone’s sovereign debt and banking sector.

Analysts also have warned the government about internal downside risks that could emanate from misguided policies or populist measures prompted by short-term politics in light of the upcoming legislative and presidential elections in 2014.

As global economic uncertainty will continue to affect the natural-resource commodity market and given that investments in the country have historically tended to be closely correlated with international commodity prices, it has become even more imperative for the government to maintain policy consistency, especially because investment in resource-based ventures require long-term commitments.

The World Bank and foreign analysts have raised concerns over a string of legal and regulatory announcements over the past few months, notably those in the mining sector, which investors have seen as inimical to the viability of long-term investment projects.

Given the vulnerable situation amid global economic uncertainty and with investors remaining mostly skittish, maintaining the clarity and consistency of the regulatory framework and effectively conducting meaningful communication about any new reforms may make a decisive difference for both the investment and the broader economic outlook.