Government to revise 2003 state budget assumptions

The Jakarta Post, Jakarta

Responding to the Bali terrorist strike, the government will revise the assumptions for its 2003 draft state budget, possibly resulting in a greater budget deficit but one that the World Bank has estimated will require only limited additional funding.

Finance minister Boediono said on Thursday the government would adjust the budget assumptions to take account of the likely weakening of the economy because of the Bali bomb explosions.

"We're working on the various assumptions ... which of them may be affected? We don't know yet," Boediono told reporters after an informal consultation with legislators.

The massive bomb explosions, which killed nearly 200 people, have clouded Indonesia's economic outlook with a subsequent weaker tourism sector and another plunge in foreign direct investment likely.

Boediono said that while the current state budget was "safe" the government would need additional help with next year's budget.

"We're trying to get more aid from our donors like Japan; our biggest creditor," he said but added that any additional funding would come as part of the loans to be extended by the Consultative Group on Indonesia (CGI).

The CGI groups together Indonesia's main foreign creditor countries. The group plans to hold its 12th annual meeting with the government to pledge new loans to help cover the budget deficit next year.

World Bank country director Andrew Steer agreed that Indonesia needed extra help due to Bali, but added "I don't see financing as the big problem issue. I see this an issue of confidence."

Steer urged the government to "more than ever" push for structural reforms like sorting out its banking sector, improving the judiciary and curbing corruption so as to bolster business confidence.

He added that Indonesia's prudent macroeconomic management also meant the country had some leeway to absorb a hit like Bali.

For now, the government expected a shortfall of around Rp 26.26 trillion (about $2.8 billion). That equaled about 1.3 percent of Indonesia's gross domestic product (GDP), which measures the total value of the products and services produced within the country over one year.

In its 2003 draft budget, the government has drawn up a number of assumptions that determine the expected amount of expenditure and revenue, or lack of it.

Amid signs of greater economic stability, the budget assumes an average inflation rate of 8.7 percent, the rupiah at 8,700 to the U.S. dollar, and Bank Indonesia three month rates averaging 13 percent.

Expecting world oil prices of around $20.50 a barrel, the budget targets the economy to grow by 5 percent in 2003 compared to about 4 percent this year.

But as the economic fallout of the Bali blasts starts to be felt, economists say the draft budget was becoming unrealistic.

So far, the strongest signals have come from the tourism sector where a string of cancellations are sapping revenues from airlines, hotels and local economies in tourist destination areas.

The impact does not stop there, however. Manufacturers fear foreign buyers could divert next year's orders to safer countries.

At least one international insurance committee has raised the premium risk on Indonesia after including this country in its list of war-risk zones, on a par with Afghanistan and Somalia.

A senior Bank Indonesia official warned of foreign lending institutions setting higher risk premiums for investments in Indonesia. These would further erode capital inflows.

Meanwhile, banks face a drop in fee-based income as tourists, who contribute around $5 billion a year in foreign exchange earnings, mainly via credit cards, money transfers and travelers cheques, are now likely to spend a hefty chunk of this money elsewhere.