Indonesia's budget deficit target revised to 2.5% of GDP

On back of slower economic forecast.

According to DBS, Indonesia's revised 2014 budget is currently being tabled in the parliament. 2014 GDP growth forecast has been downgraded to 5.5% (from 6.0% previously). Average USD/IDR is brought up to 11,700 (from 10,500 previously). The budget deficit is revised up to 2.5% of GDP from 1.7% previously.

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The most interesting piece of information concerns the amount set for fuel subsidies. That is said to be revised up to IDR 285tn, or a 35% rise, from the original IDR 210tn. 

Three main factors have contributed to this significant revision. Strong consumption prevails in the economy. Oil production is set to miss its original target yet again. And the original USD/IDR assumption of 10,500 is quite some distance away from the prevailing market rate. 

For 2014 budget deficit to remain under 2.5% of GDP, some significant downward adjustments in government expenditure are imminent. After all, revenues are supposed to moderate as well (about 4% lower), given that economic growth currently underperforms. Central government spending is adjusted downwards by some 15%, with bulk of the adjustment seen in the Ministry of Public Works. 

Based on recent comments of the Finance Minister, these are typically low-impact operational expenditures, although we expect some development expenditures (typically with greater multiplier effects) to be affected too. Going by the trend in recent years, actual spending on fuel subsidies tends to go over budget. 

There are risks that the actual fiscal deficit may even be higher than the budgeted 2.5% of GDP this year. While it is still likely to be below the 3% maximum threshold (unless the benchmark Indonesian crude oil price were to significantly rise above the assumed USD 105/barrel price tag), pressure on the fiscal deficit may mean further cuts in development spending if fuel subsidies were to be maintained.