Oil price plunge threatens budget

Moch. N. Kurniawan, The Jakarta Post, Jakarta

The current plunge in oil prices could spell serious trouble for the country's 2002 state budget due to a significant revenue shortfall, analysts warned on Monday.

Economist Hendri Saparini of private think-tank Econit said that if oil prices continued hovering at the current level of around US$17 per barrel, the state budget deficit could swell to 3 percent of gross domestic product from the projected 2.5 percent of GDP.

She said that there would be a potential loss of around Rp 5 trillion (US$471 million) per year if oil prices fell by only $1 from the 2002 budget assumption of $22 per barrel.

A greater budget deficit would trigger fiscal instability, which in turn creates new risks to economic growth, which has been projected by the government at 4 percent next year.

"I'm not optimistic that oil prices can reach the targeted $22 per barrel," Hendri told The Jakarta Post.

Brent crude prices plunged to a 29-month low of $17.02 per barrel on Monday amid concerns of an oversupply at a time of weak demand due to the global economic recession. The price was still at more than $31 per barrel before the Sept. 11 terrorist attacks on the U.S. which exacerbated the current global economic slump.

There are fears that oil prices will continue to fall as major non-OPEC countries have resisted demands by the Organization of Petroleum Exporting Countries (OPEC) to cut output by 500,000 barrels per day (bpd). The oil cartel recently agreed to cut production by 1.5 million bpd only if the non-OPEC players make a significant output cut as well.

Indonesia, which is the only OPEC member in Southeast Asia, relies heavily on oil revenues to finance the state budget.

The government has budgeted for an expected Rp 66.1 trillion from oil and gas revenues in the 2002 state budget.

An expert from the ministry of energy and mineral resources previously told the Post that one alternative for the government to cushion the impact of the oil price plunge was to consider protectionist measures for the country's oil sales price at $22 per barrel through a hedging mechanism.

But economist Bustanul Arifin of Indef (Institute for Development of Economics and Finance) said that at the current price of oil, it would be nearly impossible to achieve the expected target.

"Who would dare purchase the hedging contract...it's too late. The government should have done it previously when the prices were quite high," Bustanul said.

He also stated that despite the very real possibility that the 2002 oil price assumption would not be achieved, for political reasons, the government would not revise its budget assumption.

He said that the government would prefer to carry over the loss to the 2003 state budget.

Some analysts believe the slump in oil prices will help accelerate the economic recovery of developed nations such as the U.S., which in turn should bode well for the exports of developing economies like Indonesia.

But Bustanul said that the costs associated with an oil price plunge outweighed the possible benefits to the Indonesian economy, adding that the country's export performance would not necessarily increase due to a host of domestic problems including security and labor issues.