OREANDA-NEWS. Indonesia's passage of a tax amnesty law should bolster government revenues, support foreign reserves and expand the fiscal space to allow increased public capex, says Fitch Ratings. However, the long-run effects on the revenue base, financial institutions and corporates are difficult to determine at this stage.

The amnesty will take effect on 1 July and last until 31 March 2017. Expectations on the immediate revenue impact vary widely, with Bank Indonesia estimating a boost of IDR53trn (USD4.0bn) while the Ministry of Finance expects IDR165tn (USD12.5bn). The repatriation of capital overseas to take advantage of the amnesty should also support the rupiah and foreign reserves, at least in the short term.

The extent to which the new amnesty law is positive for Indonesia's creditworthiness will depend on how long and by how much revenues are bolstered beyond the immediate period. The precedent from previous tax amnesties is mixed, and the revenue impact could be limited or a one-off boost.

Indonesia's small fiscal base is a credit weakness, with government revenue at around 13% of GDP. This is low relative to its 'BBB' range peers. Only four out of 113 rated sovereigns have a smaller revenue intake as a percentage of GDP and they are in lower rating categories. A larger revenue base would mean less fiscal rigidity and vulnerability to public finance shocks while enabling greater infrastructure investment to facilitate higher growth. Indonesia has also historically had a relatively large revenue dependence on commodities, which a larger fiscal base would mitigate.

Fitch maintains its 2016 fiscal deficit forecast for Indonesia at 2.7%. The revenue boost that the amnesty will provide is likely to be used primarily to support public capex - a key plank in the government's strategy to boost long-term growth.

Overall, Indonesia's credit profile is supported by a low government debt burden, relatively strong growth outlook and limited sovereign exposure to banking sector risks. This is balanced by a relatively weak external position and business environment; although a strong structural reform drive, if successfully implemented, should gradually improve the latter and bolster investment. Fitch affirmed Indonesia's Long-Term Issuer Default Rating at 'BBB-' with Stable Outlook in May.

The banking sector should also receive a one-off benefit over the course of the amnesty as repatriated funds invested in deposits or other banking products improve liquidity conditions. There are potential indirect benefits too, to the extent that the tax amnesty may help bolster economic growth through public investment. But there are significant uncertainties on the scale of the direct and indirect effects for banks.

The property sector could also benefit from increased demand as the amnesty will provide an opportunity for taxpayers to declare undocumented wealth and divert it to local real estate. Sales in the Indonesian property market have waned in the past 18-24 months as buyers have deferred purchases and developers postponed launching new projects, partly due to the government's crackdown on tax evasion and as buyers awaited the passage of the amnesty law.

Any positive effects on the property market are likely to be lagged. This is because there may be a surge in new property launches once the amnesty takes effect, which is likely to limit any near-term benefit for developers. The effects for developers will also significantly depend on pricing given that affordability remains an issue.