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Indonesia ready to widen budget deficit amid darkening outlook

Bloomberg - November 20, 2019

Viriya Singgih and Karlis Salna – Indonesia's government is prepared to widen the budget deficit further to counter a potential deeper deterioration in the global growth outlook, Deputy Finance Minister Suahasil Nazara said.

Authorities already have increased this year's deficit target to as much as 2.2% of gross domestic product, and are ready to raise it in 2020 if necessary, Nazara said in an interview Tuesday in Jakarta.

"Next year we will start with 1.76%. If the global economy continues to be rough, and the impact on Indonesia continues, we will widen the deficit," he said.

Indonesia's economy has held up relatively well during the global slowdown, but policy makers are increasingly worried about the outlook as the economy has lost momentum in every quarter this year.

The government has revised down its growth forecast for the year several times, with revenue set to disappoint and exports slumping amid the U.S.-China trade war.

Global prospects

"Next year the global economy will continue to remain rough," said Nazara, a former head of fiscal policy who assumed his current post last month. He expects the International Monetary Fund, which forecasts the world economy to grow by the slowest pace in a decade this year, to pare back estimates yet again.

Slowing global growth presents risks for capital inflows to Indonesia, foreign direct investment and trade, Nazara said.

"In that sense, we have to be ready for the impact to Indonesia," he said. If the government has to widen the deficit to bolster the economy, "that's fine."

The government has steadily raised this year's deficit target from an initial 1.84% of GDP as the revenue outlook deteriorated. Data earlier this week showed the shortfall had climbed to more than $20 billion at end-October, or 1.8% of GDP.

Deficit ceiling

The deficit is legally capped at 3% of GDP and authorities are mindful of approaching that level, Nazara said.

"The closer you are to 3% the more the government is vulnerable, and we don't want to be in a position where we're cornered by the market," he said, adding that the government must keep its financing costs as low as possible.

Indonesia's government now projects the economy to grow by about 5.1% this year, compared to an initial estimate of 5.3%. Exports slumped for a 12th consecutive month in October, while imports of capital goods also have plunged, underscoring worries about investment.

Bank Indonesia has cut interest rates four times by a total of 100 basis points since July. A majority of 30 economists in a Bloomberg survey expect the central bank to leave rates unchanged when it meets Thursday.

Nazara said the current growth rate is still good given the global climate. "I keep saying that 5% economic growth is more than enough to keep the momentum going," he said.

Source: https://www.bnnbloomberg.ca/indonesia-ready-to-widen-budget-deficit-amid-darkening-outlook-1.135059