'It is true that one has to wonder where the government can
\nfind the extra money to cover these additional expenditure
\nrequirements.'<\/p>\n
;JP;
\nANPAk..r..
\nIndonesia-Budget
\n2005 Indonesian Government Budget: Are we in wonderland?
\nJP\/6\/KAHLIL<\/p>\n
2005 Indonesian Government Budget: Are we in wonderland?<\/p>\n
Kahlil Rowter
\nJakarta<\/p>\n
Like Alice, our initial reaction is astonishment at the
\nproposed 2005 budget the government unveiled last week.<\/p>\n
No, this is not in the same category as the Soeharto budget
\nearly in 1998 or the Habibie economic report in 1999, but
\ndistance between reality and imagination exists here too. It
\nappears that the first thing the next government (whoever wins)
\nmust do is to both inject more reality and impose a sense of
\ndirection for the economy into the 2005 government budget.<\/p>\n
The budget structure itself does not deviate much from the
\n2004. The assumptions, however, appear problematic. Take the
\ngrowth figure. Moving from 4.6 percent to 5.4 percent might not
\nseem such a huge jump, especially if we use the new gross
\ndomestic product (GDP) figures from the Central Agency of
\nStatistics.But one must question where the source of growth will
\ncome from. Unless investment picks up significantly it is
\ndifficult to imagine this being possible. Investment in this case
\nreally depends on foreign sources in direct or portfolio flows.<\/p>\n
Although there is hope that some diversion of funds currently
\nabsorbed by China one must bear in mind that neighboring
\ncountries are currently a lot more attractive. And with the world
\neconomy on a cooling trend exports can hardly be expected to grow
\nsubstantially. Consumption, the mainstay of growth so far, is
\nalso showing signs of tapering off.<\/p>\n
The inflation cum interest rates assumptions also raise
\nquestions. Unless Bank Indonesia raises rates more aggressively,
\nthe current inflation level of around 7.2 percent appears set to
\nrise, mainly driven by weak and potentially weaker rupiah. More
\nimportant is the wide spread expectations that inflation will
\nrise in the near future. Mandiri Sekuritas expects inflation to
\nreach 7.5 percent by year end and 6.5 percent next year.<\/p>\n
But if we look at the GDP growth and inflation assumptions in
\ncombination, it might just work! Real GDP growth (5.4 percent)
\nplus inflation (5.5 percent) becomes the nominal GDP growth
\n(10.9 percent). So if both misses their targets, say growth
\nremains around 4.5 percent and inflation stay at 6.5 percent, the
\ntotal is still around 11 percent. And this will make the nominal
\nGDP in 2005 at about the level assumed. The result: Tax revenues
\nwill probably be realized. As long the two totals up to around 11
\npercent there really is no need to worry.<\/p>\n
A higher inflation entails higher interest rates. So if
\ninflation is expected to still hover around 6.5 percent it is
\nreasonable to expect that SBI (Bank Indonesia promissory notes)
\nrates too will be at its current level of a little below 7.5
\npercent. Every 1 percent of SBI rate rise increases the interest
\nburden on floating rate government bonds of about Rp 2.2 trillion
\n(US$256 million). But this must be balanced against the increase
\nin interest tax of Rp 1 trillion.<\/p>\n
We come now to the most glaring difference between assumption
\nand market reality: The oil price assumption. The current world
\noil price is US$48 per barrel. Ignoring the difference between
\noil price benchmarks, this is double that used in the budget
\nassumption.<\/p>\n
For every one dollar world oil price above the assumption,
\nThe Ministry of Finance calculates the impact to be between Rp
\n100 billion to Rp 150 billion extra expenditure requirement. This
\nis because the central government pays all of the fuel subsidy
\nwhile revenues must be shared with producing regions. Oil
\nanalyst maintain that the political premium of world oil prices
\ncurrently stand at about $9-10 per barrel. Therefore the \"normal\"
\nworld oil price should be around $38-39 per barrel.<\/p>\n
So what is the extra expenditure requirement should both the
\ninterest rate and the oil price assumption turn incorrect? Adding
\nthe extra interest expenditure requirement of about Rp 1.2
\ntrillion, plus the oil price extra cost of Rp 2.25 trillion, we
\nget Rp 4.45 trillion. Not a huge number in a Rp 380 trillion
\nbudget. Even if we increase the SBI rate to 8.5 percent and oil
\nprice to $40 per barrel, the additional cost is \"only\" slightly
\nless than Rp 6.5 trillion.<\/p>\n
Another item sensitive to the assumptions is the payment of
\nforeign debt which stands at Rp 47.8 trillion. Taking out the
\ndisbursement of foreign loans of Rp 26.6 trillion we are left
\nwith net payment of a little over Rp 20 trillion. We have to add
\nto this the interest on foreign loan of about Rp 25 trillion. As
\na simplification where we ignore the impact of currency movements
\non income (import-export taxes etc.) every time the rupiah
\ndepreciates Rp 100 over the assumed level of Rp 8,600, the
\nadditional loan payment burden rises by about Rp 523 billion.
\nShould the rupiah weaken significantly, say to Rp 9,200 the
\ngovernment will have to come up with an extra Rp 3.2 trillion.<\/p>\n
These simple exercises using published figures show that the
\nadditional burden from missing several targets are substantial
\nbut not alarming. It is true that one has to wonder where the
\ngovernment can find the extra money to cover these additional
\nexpenditure requirements.<\/p>\n
One source would be a stronger effort in privatization, no
\nmatter the political difficulty of doing so. Another source would
\nbe to up-size issuance of government bonds, already at a record
\nhigh of net issuance of around Rp 20 trillion. These are the easy
\nsteps.<\/p>\n
More difficult, but more important in the long term, is to
\nincrease efficiency of revenue collection, especially tax ratios
\nwhich by international comparison is very low. Several non-tax
\nrevenues sources should also be enhanced.<\/p>\n
A friend recently reminded me that value added taxes revenue
\nis too low considering that the rate is at 10 percent. Increasing
\njust this one item to near its potential can easily solve the
\npresently planned deficit and prepare funds should the
\nassumptions are missed.<\/p>\n
We are not in wonderland. That is for sure. But if one is
\nlooking for inspiration in the 2005 proposed budget, look
\nelsewhere.<\/p>\n
The writer is Head of Research Mandiri Sekuritas. This column
\nwas written in personal capacity to enhance public debate.<\/p>",
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