Wed, 15 Oct 2008
Aditya Suharmoko, The Jakarta Post, Jakarta

Feeling the heat from the global financial woes, the government has revised down budget assumptions for next year -- including economic growth, Finance Minister Sri Mulyani Indrawati says.

2009 State Budget
Assumption Original Proposed Changes
Growth 6.3% 5.5 - 6.1%
Exchange Rate (Rp/US$)
9,150 9,500
Inflation 6.2% 7.0%
BI Rate8.0% 8.5%
ICP (US$ per barrel) 95 85
Source: Finance Ministry


On Monday, the government submitted to the House of Representatives' budget committee its plan to cut the current economic growth assumption of 6.3 percent to between 5.5 percent and 6.1 percent.

Inflation is now assumed next year at 7 percent, up from the 6.2 percent set earlier, which is still in line with the central bank's estimate of 6.5 percent (plus or minus 1).

Sri Mulyani said the revision was needed as "the global economy has worsened since the House's budget committee set the assumptions on Sept. 24, 2008".

"To fulfill the aspirations of the House, (business) players and analysts, the government and the House need to anticipate the impact of the global economic crisis."

Despite the change in assumptions, the government will not reduce the budget allocation for government offices and ministries, and will maintain the education budget at 20 percent of government spending, she added.

Within the new range of between 5.5 percent and 6.1 percent, Sri Mulyani said the economy was expected to grow by 5.6 percent in 2009, citing September's consensus forecast of the World Economic Outlook issued by the International Monetary Fund (IMF).

The economic slowdown in major economies is likely to harm exports, while a high interest rate at home would derail private consumption. But, "we will try to protect people's purchasing power from the impact," Sri Mulyani said.

The government said that if the macroeconomic assumptions were left untouched, it would have to look for Rp 53.9 trillion (US$5.26 billion) in deficit financing.

The government suggested the deficit be cut to Rp 71.3 trillion, or 1.3 percent of GDP, from the earlier assumption of Rp 91.8 trillion, or 1.7 percent of GDP.

Under the revision, the government will reduce the amount of government bonds issued next year from Rp 103.5 trillion to Rp 54.7 trillion, in anticipation of the global financial crisis shrinking investors' appetite for bonds.

"U.S. and European investors, Indonesia's largest global bond buyers (65 percent so far) will lose their appetite. National banks will need liquidity for borrowing," she said.

To plug the deficit, the government will therefore look for other financing schemes from multilateral agencies and institutional investors who want to buy Islamic bonds (sukuk).

Meanwhile, the House's committee vice chairman Suharso Monoarfa said lawmakers in general understood the government's move and would speed up the deliberation of the proposed revision.

"We will finish all discussions by tomorrow (Tuesday) before we step into detailed spending allocations," he said.

Nevertheless, disagreement persisted during the deliberation, in particular on the central bank's benchmark interest rate. While the government proposed the rate at 8.5 percent, the lawmakers wanted a lower rate to help stimulate domestic industry.

Late on Wednesday, an agreement was reached to set the rate at 7.5 percent.

"Most countries are now cutting their rates in the wake of the meltdown," Suharso said. (ewd)



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