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INSIGHT: State budget 2018: An appropriate dose of caution
Indonesia’s proposed state budget for 2018 reflects optimism as well as caution.
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Ready: Lawmakers are pictured inside the House of Representatives building. (Tempo/-)
I
ndonesia’s proposed state budget for 2018 reflects optimism as well as caution. The assumptions for growth of 5.4 percent and inflation of 3.5 percent are the optimistic part. A deficit at only 2.2 percent is the cautious part. Risk from missing the assumptions is minimal. But risk from missing revenues or financing targets can be consequential.
Let us first review the assumptions.
Gross domestic product (GDP) growth projected at 5.4 percent is quite optimistic, given that the first half of 2017 only saw close to 5 percent. More government expenditure in the second half might help growth a little. But private consumption, the bulk of GDP, has been growing at an annual rate below 5 percent in the last few quarters. Other retail indicators are also not performing well.
Hence, it is difficult to envision a high-growth scenario popping up anytime soon. Also, the recent fall in commodity prices means exports are tapering down again. Still, the risk that could stem from missing the growth assumption is minimal. The government estimates that 1 percentage point lower growth raises the deficit only by Rp 10 trillion (US$750 million).
As important as real growth is nominal growth. This is the number you get by adding real growth and inflation. We see that for 2018, it is set at 9 percent, lower than 9.5 percent in 2017 — which shows caution.
The rupiah set at 13,500 per dollar is optimistic in the face of global monetary tightening, but recent news from the United States is telling us that the Fed may not be in a hurry to raise rates or quickly reduce its balance sheet. Hence, the rupiah may not be in any immediate danger. Also, capital inflows to Indonesia may help the currency from weakening too much.
A short-term bond yield of 5.3 percent is optimistic given the global monetary tightening. However, this will depend a lot on inflows into the government bond market. The Ministry of Finance plans to reduce average debt maturity to lower the average yield. Depending on investor appetite this might succeed. A dearth of supply in the short end could keep yields from rising too fast. Also, the central bank has given hints it may further relax its monetary stance. This creates room for short-end yields to decline.
