The expectation of a wider deficit in the 2017 revised state budget proposal is a wake-up call for the Indonesian government to spend more on productive sectors to meet a higher economic growth target of 5.2 percent this year, an economist said.
The government now expects its budget deficit to reach 2.92 percent, higher than the 2.41 percent in the current state budget.
Fakhrul Fulvian, an economist at Bahana Securities, said the government has been careful in reducing subsidy spending to maintain price stability which, in turn, will keep inflation under control.
“To keep a sustainable fiscal health and to maintain the market’s trust in Indonesia’s economic stability — [as indicated by] international rating agencies — the government needs to show consistency in reducing subsidy spending,” Fakhrul said in a statement on Monday (10/07).
The deficit may force the government to issue around Rp 60 trillion more in bonds to cover spending, not yet an alarming figure since, even if that happens, the country’s total debt will remain under 30 percent of its gross domestic products, Bahana Securities said.
According to the revised state budget proposal, the government will spend a total of Rp 2,111.4 trillion ($158 trillion) this year, 1.5 percent higher than Rp 2,080.5 trillion in the initial budget.
In the proposal, the government expects revenue to reach only Rp 1,714.1 trillion, 2.1 percent lower than its initial target of Rp 1,750.3 trillion.
The rising expenditure is the result of higher spending on fuel subsidies, which have now reached Rp 103.1 trillion from an expected Rp 77.3 trillion, due to higher global oil prices.
According to Bahana Securities, the government should keep fuel price at its current level as long as global oil prices stay under $50 per barrel, but once the price goes beyond $50 per barrel, then a price hike is inevitable.
“Fuel price adjustment will positively affect the bond market because it shows fiscal risks in Indonesia are well under control,” Fakhrul said.
The revised state budget also included extra spending for connectivity infrastructure, prison renovations and preparations for the 2018 Asian Games.
The 5.2 percent economic growth target in the proposal is higher than the 5.1 percent estimated in the original 2017 state budget. Bahana Securities expects the economy to grow at 5.3 percent.