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Expanding bond market
As bonds become a better alternative source of funds, more companies will improve their governance to gain an investment-grade rating from credit rating agencies.
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Indonesia has begun to tap into the green bond market, both at home and overseas, to finance environmentally friendly projects.
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T
he government’s decision to cut the income tax on bond interests from 15 to 10 percent for domestic investors as of September will be a great boon in encouraging retail investors to buy government and corporate bonds, not only because the interest income from time deposits at banks is still subject to a final tax of 20 percent, but the interest of time deposits has also declined to a range of only 2.5 to 3 percent a year.
Even though the new policy is also aimed at establishing income tax parity between domestic and foreign investors, the lower tax is also expected to deepen the financial market and make bonds more liquid. Earlier in February, the government slashed the income tax on bond interest for foreign investors from 20 to 10 percent as global investors have become net sellers of late.
The reduced tax rate applies to any income received or gained by investors in the form of interest, fees, profit sharing, margins and any other similar income derived from bonds issued by the government and non-government institutions, including sharia bonds (sukuk). Individual and corporate taxpayers can enjoy this treatment, including permanent establishments, mutual funds and collective investment contracts.
Although the tax cut will certainly reduce the government’s tax revenue, the policy would bring down the cost of funds as bigger demand for bonds will decrease their yield. This would, in turn, encourage regional administrations to tap municipal bonds for development financing. Bond issuances will require local administrations to get an investment-grade rating, which, in turn, will force them to improve their governance and transparency.
As the demand for bonds from domestic investors will increase, the role of foreign investors in government bonds — which at its peak had reached almost 40 percent — would decrease and this would reduce the risks of market instability anytime the market perception turned negative. In the past, anytime the market perception reacted negatively to government policies or political conditions, foreign investors were the first to unload their bonds, causing a sudden increase in the demand for foreign exchange and affecting the rupiah exchange rate.
On the negative side, the reduced income tax rate on bond interest may affect investors' interest in the stock market, which has of late begun to recover strongly. This is inevitable, even though the impact would hit retail investors the hardest — the very same people who prefer a stable and fixed income.
However, the negative impact could still be offset by the expected stronger demand for corporate bonds. As bonds become a better alternative source of funds, more companies will improve their governance to gain an investment-grade rating from credit rating agencies. This will further deepen the financial market and will in the long run improve governance in the private sector, as bond issuers, like publicly-traded companies, are subject to stringent disclosure requirements.
According to Indonesia Stock Exchange (IDX), there are around 130 outstanding bonds and sukuk issued by the government and more than 900 outstanding bonds and 200 sukuk issued by corporations in Indonesia’s bond market.
