“We will use the strong foundation he has built, especially in the economic sector, to work faster, harder, to bring results as quickly as possible to the Indonesian people,” Prabowo said.

In this article, we will explore the significance of the outcome for the Indonesian economy.

The ground reality

Joko “Jokowi” Widodo came to office in 2014 by pitching a promise of raising the Southeast Asian country’s growth rate to 7%. Prabowo has taken the game higher by suggesting that a double-digit growth was possible.

However, the Q4 2023 data shows that Indonesia’s GDP growth settled at 5.0%. The economy grew 0.45% compared to the previous quarter, and economic activity picked up ahead of the election.

Household spending (up by 4.5%) supported the growth. Government outlays posted growth but were more modest, up roughly 2.8%. The economy also got a boost from fixed capital formation, which expanded 5.0%, thereby managing to post decent growth despite seeing borrowing costs at elevated levels.

While Indonesia’s growth remains resilient, supported by declining inflation and a stable currency, the World Bank states that the nation’s GDP growth will ease slightly to an average of 4.9% over 2024-2026 from 5% in 2023 as the commodity boom loses steam. Private consumption will be the primary growth driver, while business investment and public spending will also pick up due to reforms and new government projects.

However, the overall economic outlook still possesses downside risks, mostly due to external factors like higher-for-longer interest rates in major economies, which, apart from weighing on global demand, will increase borrowing costs and make it harder to borrow on world markets. Add the geopolitical uncertainties, which may disrupt supply chains.

The World Bank has some advice for the Southeast Asian country: speed up growth and strengthen resilience while transitioning into a low-carbon and climate-resilient economy that will eventually reduce poverty.

Despite being a resilient economy, achieving the 7% target looks like a pretty tough one for Indonesia as of now. The last time it achieved the milestone was way back in 1996, just before the Asian Financial Crisis. Since the Southeast Asian country transitioned to democracy in 1998, promises of higher growth have remained as empty rhetoric than the policies that could have supported the plan.

Looking back at the Jokowi rule

Widodo wasn’t able to complete his “7% growth” prophecy. However, he has achievements to flaunt. A decade ago, Indonesia used to be one of the “Fragile Five”, a group of emerging-market economies vulnerable to high interest rates abroad and a strong dollar. As of 2024, its current account is roughly balanced and its external debts are modest.

Jokowi’s omnibus bill, which cuts restrictions on foreign investment and simplifies licensing, finally became law in 2023. Also, Indonesia’s infrastructure has improved over the past decade, highlighted by the construction of thousands of kilometres of roads.

Jokowi’s other milestone is Indonesia’s nickel-focused industrial policy. The metal is used in electric vehicle (EV) batteries, and Indonesia has the world’s largest deposits. Indonesia, by banning the export of its raw ore, is now forcing companies to process and manufacture in Indonesia. BYD, Ford and Hyundai are now investing in the Southeast Asian nation.

Exports of ferronickel, a processed form of the metal, rose from $83 million in 2014 to $5.8 billion in 2022. However, as per Cullen Hendrix of the Peterson Institute for International Economics, lithium-iron phosphate batteries, which contain no nickel, are becoming more popular. Sodium-ion batteries, which need neither nickel nor lithium, could surpass both types. In 2024, JAC Motors, a Chinese carmaker, delivered the first lot of commercial vehicles powered by sodium-ion batteries to customers.

Despite reforms introduced by the omnibus law, rules requiring imports to be screened at particular entry points have remained at a 22% tariff, and as per the World Bank, the ratio is more than twice the South-East Asian average.

Compare Indonesia with its neighbours Malaysia, Thailand and Vietnam and there is a stark difference. The three countries place fewer restrictions on outside investors and are becoming obvious destinations for firms looking for alternatives to Chinese manufacturing. Indonesia is losing out big time here, as its exports of electronics are not just lower than any other large economy in Southeast Asia, but the sector’s overall growth ratio in the country has slowed down too.

However, not everything is bleak. Since 2014, the Indonesian economy has grown by an average of 4.2% every year. Take out the pandemic years of 2020 and 2021 that figure goes up to 5.1%. Economic activity has not remained entirely dependent on commodity exports, with growth being increasingly driven by a combination of consumption and investment.

According to World Bank data, net foreign direct investment averaged USD 15.5 billion a year from 2014 to 2022, and portfolio investment averaged USD 12.6 billion a year. Investment has come from a variety of sources and in a variety of forms. Domestic capital markets have flourished, especially the stock exchange, whose market cap has grown tremendously over the last 10 years, with hundreds of new companies having gone public.

On the infrastructure front, the count of toll roads, airports, power plants, and dams has gone up in 10 years. At the same time, fiscal reforms drove tax revenue up. Despite increased spending, Indonesia’s fiscal health is quite good. One can argue that the Jokowi era also saw wasteful public works projects, widespread corruption, and the prioritisation of economic growth over the interests of local communities and the environment. However, a 5% annual growth anchored by investment and consumption, combined with big spending on infrastructure and social welfare and financed by sound fiscal policies makes the outgoing President’s rule a fruitful one.

Indonesia has a goal of becoming a high-income developed country by 2045. To fulfil that, the nation needs a national programme capable of effectively harnessing Indonesia’s human capital and population characteristics. Widodo’s “Kartu Prakerja” programme has become a good example for the future Indonesian administration to advance the nation’s economy by harnessing human capital.

The programme, which aims to enhance the competence, productivity, competitiveness and entrepreneurial development of Indonesia’s workforce, has been made available for Indonesian citizens over 18 years who are not enrolled in formal education and do not engage with other welfare programmes.

The Kartu Prakerja programme, a conditional cash transfer scheme, started in 2020. Under it, participants get vouchers to purchase training courses and once they complete the training, they receive a cash incentive. In the pandemic-disrupted 2020, the initiative reached over 5 million. A further 17.5 million recipients were reached in the next couple of years through online training, with the beneficiaries getting digital wallet incentives through fintech companies and banks.

Reimagining things under Prabowo

What the Southeast Asian country needs is a series of reforms that will allow investors to deliver the jobs boom. These reforms can be as simple as regulatory changes like creating a truly level playing field between state-owned and private enterprises or allowing easier immigration avenues for skilled foreign labour. In short, reforms that will make the Indonesian economy a competitive one in a globalised world order. Also, Prabowo needs to ensure job creation, poverty reduction and price stability.

“Prabowo’s economic technocrats need to convince him, in the context of a still-underdeveloped tax base and limited domestic savings available to underwrite private and public investment, that alongside deepening Indonesia’s own capital markets, there is no alternative to inviting a bigger role for foreign investment in the economy if Indonesians’ expectations for growth, expanded public services and better employment prospects are to be met,” EastAsiaForum noted.

The former general has an ambitious plan to raise the tax-to-GDP ratio from 10% to 16% and become a food-exporting nation in the next four years. His 8% growth target is higher than the World Bank’s January 2024 forecast, which predicted Southeast Asia’s biggest economy to grow only 4.9% this year and next.

Bhima Yudhistira, director at the Jakarta-based Centre of Economic and Law Studies (Celios), while interacting with the South China Morning Post, called Prabowo’s 8% growth forecast a “delusional and unfounded” target that was reminiscent of Widodo’s promise of a 7% annual growth rate during his first presidential campaign a decade ago.

Prabowo intends to raise the budget deficit cap, currently set by law at 3% of Indonesian GDP, as well as increase the government debt-to-GDP ratio from the current level of 38.11%. He has pledged to uphold Widodo’s economic policies while urging the nation to adopt the best economic practices from major Asian powers such as China and India in order to progress. Additionally, he has promised to enhance the private sector’s contribution and promote efficiency in state-owned enterprises.

Prabowo has also sought advice from experts on potential new sources of tax revenue. As per the OECD, Indonesia’s current tax ratio of around 10% is lower than the Asia-Pacific average (19.8% in 2021). Bhima thinks that in case Prabowo raises taxes for the country’s 52 million middle class, the move will affect Indonesia’s purchasing power and household consumption.

Bhima credited outgoing Finance Minister Sri Mulyani Indrawati behind Indonesia’s sound fiscal discipline. However, it’s unclear that Sri will join Prabowo’s new cabinet as her relationship with the government soared since Widodo asked the veteran economist to allocate more spending to social assistance programmes ahead of the election.

In December 2023, Prabowo revealed that his programmes to modernise Indonesia’s ageing military were hindered by a lack of funding. This, as per the analysts, may have also hurt his ties with Sri.

“The future minister of finance must act as a brake on Prabowo’s populist programmes. If you can’t apply the brakes, there will be fiscal pressure that will be felt by all economic indicators, and capital outflow will occur,” Bhima told the South China Morning Post.

The post Indonesia’s future under Prabowo Subianto appeared first on International Finance.

Profit shifting, a tactic employed by businesses with subsidiaries across numerous nations, was used to evade paying all of this money. They record an excessive portion of their profits in tax havens, which are areas with little to no taxes, reported DW.com.

Despite the fact that the profits were earned abroad, this still occurs. But how does profit shifting operate, and what are the winners and losers, and why does it matter?

How does profit shifting work?

Imagine a global corporation with operations in two nations. The majority of the work is completed in a nation with high taxes. However, patents and design blueprints are examples of intellectual property that is owned by a subsidiary in a tax-haven jurisdiction.

For the subsidiary to use the registered properties, payment must be made by the company in the first country where profits are earned. Given its control over both entities, the multinational has the ability to determine the transaction price. Ultimately, it forces the high-tax jurisdictional company to make large payments to the tax-haven subsidiary.

Following the transaction, the tax haven subsidiary’s balance rises while the first company’s profit ledger declines. The multinational corporation can now declare a lower level of profit where taxes are higher and a higher level of profit where taxes are lower.

US footwear giant Nike experienced the above situation recently. According to a leaked document, the company’s local units were required to pay royalties to a subsidiary in Bermuda, where taxes are essentially non-existent, even though the production and sales of sneakers took place in high-tax countries. Multinational giants like Apple and Microsoft were the subject of similar schemes.

Why does it matter?

In 2020, when the COVID-19 pandemic hampered economic activity, the global tax revenue lost to profit shifting was estimated to be USD 200 billion. The year 2019 saw USD 250 billion as that amount.

According to estimates from a group of expert economists who convened at the COP27 in Egypt, the revenue loss in 2020 represents approximately one-fifth of the investments that developing nations require to mitigate the effects of climate change.

The EU Tax Observatory’s data coordinator, Idann Gidron, stated that only big businesses can afford to establish subsidiaries in offshore tax havens and engage in cross-border commerce. In this manner, the largest stakeholders experience a reduced tax burden.

“This creates fiscal injustice because the smaller actors in the economy have to contribute more than the wealthiest,” he said, as reported by the DW News.

Who wins?

Of course, companies that save money on taxes are the main beneficiaries of profit shifting. Their number from the United States is disproportionate.

Multinational corporations based in the US account for about 40% of all global profits.

Tax havens gain from this, but conglomerates also save billions of dollars by shifting profits.

Countries having effective tax rates of less than 15% are deemed tax havens, according to Gidron’s research. Due to the frequent use of legal loopholes to lower taxation levels, it takes into account the rates that are actually applied rather than what is stated on paper.

The research also includes nations where the profits made by multinational corporations are disproportionately large when compared to the total amount of wages paid locally; this suggests that the profits being booked are being transferred from locations where the actual work was completed.

Even in some small nations that have no taxation policies, there is more local economic activity, which is advantageous. Smaller economies may find value in local units, even if they represent very small operations for multinational corporations.

Conversely, larger tax havens can apply their reduced tax rates to the profits that have been shifted. They put money in their pockets that they wouldn’t otherwise have access to, even though the taxes are relatively small.

Where are the tax havens?

“People tend to think that profit shifting is related to countries in the Caribbean, but the tax havens that are attracting most of the profits are actually in Europe,” Gidron said.

Tropical paradises like Panama or Bermuda receive less shifted profits than nations like the Netherlands, Ireland, Switzerland, Luxembourg, and Belgium. In those nations, this leads to budget surpluses. For instance, in 2020, shifted profits accounted for nearly 60% of Ireland’s corporate tax revenue.

Profit shifting resulted in an additional USD 32 billion in taxes for the major tax havens in Europe when combined in 2020. This indicates that they are earning an amount that is roughly equal to the GDP of nations like Senegal, Honduras, or Bosnia, simply from additional taxes.

Another major contributor to tax abuse is crown dependencies and overseas British territories. Profits totalling USD 76 billion were moved to the British Virgin Islands, Bermuda, the Cayman Islands, and Jersey in 2020.

Who loses?

Countries with higher tax rates lose out on the additional revenue tax havens receive. Ultimately, this means that governments around the world have less access to public funds.

Other members of the European Union and other nations in the Organisation for Economic Cooperation and Development (OECD) are the biggest losers. The nation most impacted, Germany, might have received 26% more in corporation taxes in 2020.

But emerging and developing nations are also losing out on sizable profits: in 2020, they will lose about USD 60 billion, down from USD 75 billion in 2019 as a result of COVID-19.

Brazil serves as one example, having lost out on USD 7 billion in possible tax revenue in 2020. With that sum, 4 million more families could have been enrolled in Bolsa Familia, a basic income initiative designed to end poverty.

Is it legal?

Since profit shifting and other tax schemes operate in legal grey areas, Liz Nelson, director of the research and advocacy group Tax Justice Network, claims that the legality of these schemes is frequently determined only in courts of justice.

Multinational corporations are allowed to establish branches abroad and engage in internal trade with one another. However, profit shifting typically occurs in conjunction with the transfer of immaterial goods and services for a reason.

Although it is possible to achieve the same tax reduction goals by deceitfully pricing material goods sales, intangible assets are typically not exchanged on an open market. This is significant because prices paid between a multinational corporation’s units should reflect what is typically seen in transactions by unaffiliated parties, per international regulations.

When there’s no clear indication of what a normal price is, it’s harder for tax authorities to build a case against abusing multinationals.
“Such schemes may not be criminal in a legal sense, but morally they’re wrong. Governments are complicit, and multinationals are complicit. They are creating hardship for people that might be their employees,” Nelson said.

What can be done to solve it?

Notwithstanding initiatives from organisations like the OECD, the amount of profit shifting has remained steady worldwide since 2015, according to the EU Tax Observatory. Although prior policies might have stopped the amount from rising, the researchers point out that this does not imply that they had no impact at all. They do concede, though, that more needs to be done.

About 140 nations came to an agreement in 2021 to impose a 15% global minimum corporation tax rate. However, the researchers from the EU Tax Observatory assert that because of loopholes that would let some nations continue to tax businesses at lower rates, the tax agreement is insufficient.

Rather, they are suggesting eliminating all tax breaks and raising the tax bracket to 20%. There could be an additional USD 250 billion in tax revenue collected globally annually as a result, they claim.

The post Tax haven: Knowing the winners & losers appeared first on International Finance.

Here is all you need to know about Britain PM Liz Truss’ energy plan.

How much should Brits pay?
Starting in October, the annual cost for a typical household using 12,000 kWh (kilowatt hours) of gas and 2,900 kWh (kilowatt hours) of electricity will not exceed £2,500. That annual bill would have been £3,549 a year without our action. A year ago, it cost £1,277.

However, you will pay extra if you consume more gas or electricity than that. This promise is valid for two years. For dual fuel clients paying by direct debit, the average unit price will be capped at 34.0 pence per kilowatt hour (kWh) for electricity and 10.3 pence per kWh for gas. The modest increase in standing charges still remains scheduled for October.

Will Brits have to pay back the discount?
The government is using borrowed funds to pay for this. It now becomes part of the overall national debt. The cost will be specified later, according to Britain PM Liz Truss.

In the future, taxes might be used to pay for that, but for now, the government will borrow money from international lenders and pay a premium. The cost of so-called “green levies” will once again be covered by borrowing against tax revenue.

Will Brits still get cost-of-living payments?
According to current plans, these payments will only be made this winter, whereas the cap will be in effect for two years. Therefore, householders will effectively pay more next winter.

Yes, this winter, they might total hundreds of pounds. Low-income households receiving specific benefits and tax credits have already received the first instalment of £326. All households will receive a £400 bill cut throughout the winter.

Support for small businesses in Britain?
Bills for businesses will be capped for six months, which is less protection than many had hoped for. Businesses with variable contracts or whose contracts are about to expire will receive the majority of this support.

The post Britain PM Liz Truss’ energy plan: All you need to know appeared first on International Finance.