Aloysius Bhui, Jakarta – The revised budget currently being debated in parliament designed to contain the fiscal deficit to 3.8 per cent of GDP should be enough to satisfy the International Monetary Fund but will prove very tough and problematic to implement, analysts said.
They said that in some cases, the revisions are quite positive, such as the reduction of fuel subsidies, as they demonstrate the government's commitment to IMF sponsored reform.
This much, however, is overshadowed by concerns over the government's ability to actually implement the changes given the current political impasse between the president and parliament, and the possible very negative popular reaction to the higher prices that may result from some of the changes.
The parliamentary budget task force has so far approved government proposals to cut fuel subsidies from an anticipated 66 trillion, which will see fuel prices rise an average of 30.1 per cent. In the original budget, fuel subsidies were estimated at some 41 trillion rupiah; if the revised budget restored that figure it has been suggested that fuel prices would rise 100 per cent.
The budget task force was reported over the weekend as agreeing on a fuel subsidy of 53.7 trillion rupiah and revised budget assumptions which include a base exchange rate of 9,600 rupiah/dollar, compared with the 7,800 originally given, interest rates of 15 per cent, up from 11.5 per cent, and inflation at 9.3 per cent, up from 7.2 per cent.
The government was forced into the revisions as domestic political concerns undercut the rupiah and the economy, compounding the impact of a US-led global slowdown on exports.
In line with IMF guidelines on the disbursement of aid, the government is trying to keep the budget deficit at 3.8 per cent of GDP, rather than the 6 per cent or more judged possible earlier, by cutting expenditures and increasing revenue.
At the moment, Indonesia needs to control the budget deficit in order to access the delayed 400 mln usd IMF loan and to prevent the further erosion of investor confidence, analysts said. "I think the government is moving in the right direction but it is still tough to reach the projected deficit of 3.8 per cent of GDP," IDEAglobal.com analyst Nizam Idris said.
He said it is possible for the government to cut some expenditure but in some cases, such as interest and foreign debt repayment, there is nothing the authorities can do to cut back. "The problem is that these expenditures are based on actual interest rates and exchange rates, instead of the projected assumptions. In other cases, the proposed increment of revenue is over-estimated," he said referring to the planned increase in tax revenue and privatisation proceeds.
Idris said the revised assumptions for exchange and interest rates are still "too low" given that they have already been overtaken by current levels and are largely hostage to political developments.
At the same time, "while the numbers are still open debate, the revision itself is positive as it will be seen as an attempt to [meet] the IMF [requirments]. I think IMF is also aware that the revision is just an attempt to limit the budget deficit. If the government is doing something, then the IMF won't pull out of Indonesia ... This [process] is showing that efforts to comply with IMF reform [are being made]."
The outlook, however, remains problematic, he said. "It will get tougher. The government will not be able to achieve the target. I think the deficit will still increase to around 4.5 per cent of GDP so later, this problem with the budget will come back again. The revisions will have to be repeated simply because the government tends to [opt for] higher estimates," Idris said. "We think it will be hard to prevent this number from exceeding the forecast," Suresh Kumar, economist at Standard & Poor's MMS said.
He said the new interest rate assumption of 15 per cent will increase interest payments on domestic debt by 16.3 trillion rupiah to 69.8 trillion while "interest expense on foreign debt will shoot up by another 11.49 trillion [to 34.59 trillion] based on an average rupiah/dollar rate of 11,680, as compared to the government's 9,600 forecast in 2001.
"Based on this increase in domestic and foreign debt [repayments] and our GDP forecast of 3.0 per cent for this year, we see the final deficit hitting 5.5 per cent, which is not far from the IMF's warning that the deficit is likely to exceed 6.0 per cent unless corrective action is taken."
Kumar stressed that these estimates have been established on a base-line scenario but there is a strong likelihood that interest and exchange rates could move against the government over the balance of the year.
IDEA's Idris said it is going to be difficult for the government to raise taxes given the global economic slowdown and domestic political problems. Additionally, it will be hard to increase proceeds from privatisation as foreign investors are unlikely to be anything but cautious current leadership and security problems are resolved.
"As a case in a point, the decision by ExxonMobil to halt production at PT Arun because of security concerns highlights how tough it will be to [even] improve confidence, let alone the direct impact on government revenue from the disruption of gas production. This problem with the budget will come back again," Idris said.
Merrill Lynch Indonesia head of research Haryanto Irawan said he is concerned about resolving the key issue that undercut the original budget in the first place, namely political risk. If the dual problems of a weak currency and high interest rates are to be resolved, "we need to reduce perceived risk. My understanding is that a change of government will at least help to reduce the risk profile. With this in mind, if the rupiah [then] appreciates, then naturally budget problems will be less than an issue," he said.