Indonesia: President unveils budget designed to safeguard financial stability
August 16, 2018
On 16 August, President Joko Widodo presented the 2019 budget to parliament. The budget sets a moderate growth target and aims to reduce the fiscal deficit, in order to reassure investors there will be no spending splurge ahead of the April 2019 elections, demonstrate the government’s commitment to prudent economic management and bolster the rupiah. However, FocusEconomics panelists judge the fiscal projections to be optimistic.
The government will target 5.3% growth in 2019, which would match FocusEconomics panelists’ estimates and be virtually unchanged from panelists expectations of 5.2% growth for this year. The budget deficit target is set at 1.8%, based on a 10% rise in expenditure, a 12.6% increase in revenues, and an oil price of USD 70 per barrel. The government also predicts a slight rise in infrastructure spending, despite recently announced delays to projects with a high import content. The budget deficit target for 2019 is down from the 2.1% that the government forecasts for this year. By maintaining a cautious fiscal stance, the government aims to send a clear signal of fiscal responsibility to markets. Moreover, it hopes to avoid a surge in domestic demand which would further boost imports and could weaken a currency which has lost around 8% of its value since the start of the year.
Although most of the assumptions made in the budget appear realistic, FocusEconomics panelists are still unconvinced that the fiscal deficit will meet government targets. Our panelists expect a larger deficit of 2.5% in both 2018 and 2019. Analysts at ING also highlight another potential problem: “A cause for concern is the possible IDR assumption of IDR14400, which is around 1.6% stronger than current levels. This could be difficult unless the government and central bank are successful in reducing the current account deficit from -3% of GDP in 2Q to closer to -2.5% of GDP. […]. A deteriorating current account deficit would keep the IDR on the defensive in 2019 and thus could frustrate economic planners.”
Author: Oliver Reynolds, Economist