Budget deficit woes may halt projects
Dadan Wijaksana, The Jakarta Post
Indonesia risks delaying some of its planned development projects this year so as to help contain the impact of the higher than planned state budget deficit resulting from soaring oil prices and a weaker rupiah, Standard Chartered Bank has warned.
The rise in oil prices, currently at record highs, and the rupiah fall could jack up the budget deficit by Rp 3.9 trillion (about US$428 million), according to StanChart economist Fauzi Ichsan in the bank's latest economic assessment.
"Because the government is unlikely to be able to raise its tax revenue to maintain its deficit target, it would have to cut its spending on other items such as the badly needed infrastructure development and funds allocation to regional governments," Fauzi said in the report.
Under the 2004 state budget, the government sets the deficit at Rp 24.4 trillion, or 1.2 percent of the nation's gross domestic products (GDP). But Stanchart now projected the deficit to widen to Rp 28.3 trillion, or 1.4 percent of the GDP.
With the country having become a net oil importer, the rise in oil prices -- which have been hovering at $40 per barrel, way above the government's average price target of $22 -- demanded more funds to be set aside for the fuel subsidy.
The oil factor alone has the potential of widening the deficit by around Rp 1.8 trillion, Fauzi added.
As for the rupiah, its fall boosts the government's spending, notably on servicing foreign debts.
"While the government has yet to give an estimate, we believe that the depreciation could further widen the deficit by around Rp 2.1 trillion," the report said, adding that it was based on the assumption that the average exchange rate of the rupiah in the year stands at 9,000 per dollar compared to 8,600 set under the 2004 state budget.
Under the current state budget (with exchange rate assumption of 8,600 per dollar), the funds allocated to service government foreign debts already reached a staggering amount of Rp 68.8 trillion, both for principal and interest rate payments.
The rupiah's shaky footing was attributed to various shocks including rising political tension in the current general election year, and the rising interest rate in the U.S.
It weakened from 8,400 per dollar at the beginning of the year to around 9,150 in July, which has made the local currency Asia's worst performer against the U.S. dollar so far this year.
However, citing potential extra revenue from further state assets sales, Fauzi was of the opinion that the fiscal impact of global market shocks would remain manageable.
"Unless the rupiah plunges to 10,000 to the dollar and the oil price continues to climb to more than $50 per barrel," the report said market shocks would be manageable, without elaborating on what would happen if the above scenario materialized.
According to the Ministry of Finance, the deficit reached Rp 18.6 trillion as of the first semester of the year, which should already account for some 76 percent of the full-year deficit target.