OREANDA-NEWS. Indonesia's long-awaited tax amnesty law has been officially announced, and is likely to be implemented between 1 July 2016 and 31 March 2017. The law should expand the fiscal space to allow for increased public capex which could provide a fillip for the cement sector, says Fitch Ratings.

Government revenues will be bolstered and allow for increased infrastructure spend. Government is preparing the investment platforms and financial instruments that will be valid for the repatriated funds. Fitch believes government will need to make it interesting to invest in infrastructure. Government has stated that one of the platforms will be to cooperate with government to invest directly in infrastructure projects. However, a more definitive form of cooperation is still awaited. The investment return in infrastructure projects is usually long-term in nature, so it remains to be seen if the applicants will be keen to invest in a project that could yield a return longer than the repatriated fund lock-up period of up to three years.

Another option is for government to support the SOE infrastructure-related companies to enter the capital market through an IPO or corporate bond issuance, where the applicants can invest their repatriated funds. PT Pelabuhan Indonesia I (Persero) (a seaport operator) and PT Angkasa Pura II (Persero), an airport operator, are two infrastructure-related companies that entered the capital market for the first time, and received a positive market response. More SOE infrastructure-related companies are set to issue bonds in 2H16, such as PT Jasa Marga Tbk (toll-road operator) and PT Hutama Karya (Persero) (construction company), and we expect government to keep encouraging additional infrastructure-related financial instruments.

Another sector that could benefit from the positive developments in the infrastructure projects is cement. Data from the Indonesian Cement Association (ASI) shows that domestic cumulative cement demand grew by 3.9% yoy as per May 2016. We feel the additional cement demand pick-up resulting from the regulation is more likely to be realised next year, as the income from tax amnesty and repatriated funds is to be received within the next nine months. Our view remains that domestic cement growth will achieve the lower end of the Association's 4%-5% target growth (see "Fitch: Indonesia Cement to Achieve Lower-End of Industry Target" dated 27 April 2016).

We view the construction sector as more exposed to the positive benefits of the tax amnesty, as opposed to the property sector. Construction activities, which utilise the bulk of cement, currently contribute around 23% to domestic cement demand. We expect this to increase, as demand in the short - to medium term is likely to be driven by infrastructure rather than property developments. Fitch views the benefits of the tax amnesty on the property market as likely to lag, given the low property affordability in the country. Bulk cement sales grew by 7.8% yoy in 5M16, outpacing 2.8% for bag cement.