Research and analysis

Indonesia: economic update: 2015 budget approved

Published 6 November 2014

This research and analysis was withdrawn on 1 August 2016

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk -Indonesia

This publication was archived on 4 July 2016.

This article is no longer current. Please refer to Overseas Business Risk - Indonesia

Summary

Indonesia’s parliament has approved the state budget for 2015, with only very modest reductions in the allocation for fuel subsidies. The parliament, however, provided a discretionary feature in the budget, as it did last year, which enables the new President to reduce fuel subsidies at a later date without parliamentary approval. Economic data released at the beginning of October serve as a reminder of the importance of this reform. Although Indonesia’s overall trade deficit shrank in the first 8 months of 2014 there remains a persistent trade deficit in the oil and gas sector. Higher inflation in September – mainly due to food, Liquefied Petroleum Gas (LPG) and electricity price rises – is not the ideal backdrop for further reform of fuel prices but is unlikely to deter action (unless it creeps up much further).

Detail

Parliament approves 2015 budget

On 29 September, the current parliament approved the draft budget with only a few changes made – in particular the reduction in the fuel subsidy bill was much less than expected. Fuel subsidies will still account for around 20 per cent of total central government spending.

The parliament, however, provided a discretionary feature in Budget 2015, as it did last year, which authorises the President to raise fuel prices without approval from the parliament – offering incoming President Jokowi an opportunity to reform subsidies at a later date. Estimates suggest an IDR 1,000 (5 cent) increase in the fuel price per litre would give additional space for fiscal spending of IDR 46 trillion (£ 2.3 billion). The fuel price adjustment will usually be followed by the disbursement of compensation funds to mitigate the impact on the poor, and the parliament has approved a compensation fund of IDR 5 trillion (£260 million) in Budget 2015.

The approved budget also envisages a slightly reduced budget deficit compared with the draft version - down from the initial proposal of 2.32% of GDP to 2.21%, by increasing revenue slightly more than expenditure. Most economists believe the fiscal deficit target is conservative and achievable, and a further reduction in fuel price subsidies would help scale down the fiscal deficit to below 2% of GDP.

Latest data a mixed bag

Official data released in early October showed that Indonesia’s trade deficit shrank to $1.4 billion in January-August 2014 (see table below), compared with $5.6 billion in the first 8 months of 2013, due to a significant improvement in the non-oil and gas sector (which enjoys a trade surplus). The moderation in GDP and investment growth has weakened Indonesia’s import demand for non-oil and gas products that are mainly used as capital goods and raw materials. The reduction in import demand was greater than the slight drop, 1.3%, in non-oil and gas exports. But the oil and gas sector ran a trade deficit of $8.58 billion in the first 8 months of this year, unchanged from the same period in 2013 and a reminder of the pressure to tackle fuel subsidies (which exacerbate fuel product imports).

Indonesia’s inflation rate increased from 3.99% (on a year earlier) in August to 4.53% in September. The increase in inflation in September was mainly driven by higher prices of both regulated-price commodities and major foodstuffs. The government raised LPG prices and electricity tariffs as part of a medium-term programme to link domestic energy prices to market prices. At the same time, the dry-season that has taken place since early August reduced rice supply and caused sub-optimal production of major Indonesian horticulture products, particularly red chilli – pushing up prices. September’s inflation rate, however, is still within Bank Indonesia’s inflation target range of 4.5% ± 1% in 2014.

Comment

Provided the new President has full authorisation and flexibility to alter fuel prices, subsidy reduction may happen sooner rather than later. A reduction in the fuel subsidy bill would help the new government promote economic growth by allowing for increased expenditure on priorities such as infrastructure and education. The inflation rate is not high enough to have implications for the likely timing of a change in fuel subsidies. But tighter monetary policy may be necessary to mitigate the inflationary effect of the expected fuel price hike, with implications for growth.

Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.