Budget revised as oil prices soar

Aditya Suharmoko ,  The Jakarta Post ,  Jakarta   |  Fri, 03/28/2008 1:38 AM

The House of Representatives and the government on Wednesday wrapped up revisions to basic assumptions of the troubled 2008 state budget.

Despite a lower assumption for gross domestic product (GDP) growth from 6.8 percent in this year's state budget to 6.4 percent, the forecast remains higher than the market expectation of between 6.0 percent and 6.1 percent.

"The (economic) growth forecast is overly optimistic, higher than what the market has been expecting," said Standard Chartered economist Fauzi Ichsan on Thursday, adding that a miss in the growth forecast would ignite changes to other assumptions.

He said the higher growth assumption would lead to a higher target of tax collection, which was seen as difficult to achieve at a time the corporate sector was facing the pinch of global turmoil in commodity prices.

Less room for fiscal stimulus, because of an erroneous allocation for energy subsidies, would also exacerbate efforts by domestic businesses to expand, he said.

Under the assumption, tax revenue from non-oil and gas is set at Rp 555.58 trillion (US$60.3 billion), and for the oil and gas sector Rp 257.18 trillion.

The inflation rate assumption has been raised to 6.5 percent from 6.0 percent, also far from market expectations of 7 percent.

However, despite market fear over further inflationary pressure, committee spokesman Harry Azhar Aziz suggested the central bank take a political move to cut interest rates to help the corporate sector get cheap loans for expansion.

"We want a political spirit from the fiscal and monetary authorities to help reduce the interest rate," he said.

Revision to the state budget has been made ahead of the usual mid-year schedule, following the unexpected skyrocketing global oil prices that forced the government to allocate more subsidies for energy.

The results of the meeting will be combined with state expenditure assumptions before submission to the House plenary session for endorsement.

The committee also set the price of oil at US$95 per barrel, far higher than $60 per barrel set in the state budget.

With the assumptions, coupled with an estimated consumption of subsidized fuel at 35.5 million kiloliters, the allocation for the fuel subsidy is set at Rp 126.82 trillion, almost triple the current allocation of Rp 42.08 trillion.

The electricity subsidy has been raised to Rp 60.29 trillion from Rp 29.78 trillion, while food subsidies are at Rp 8.59 trillion.

Oil production is set at 927,000 barrels per day (bpd), down from 1.034 million.

Fauzi said changes in the oil assumption made it more realistic as the global oil prices now hovered above $100 per barrel.

With the soaring subsidy spending the government is predicted to suffer a budget deficit of Rp 94.5 trillion, or 2.1 percent of the country's GDP growth. It will cover the deficit from domestic and foreign loans.

The Basic Assumptions of the 2008 State Budget Revision

Basic Assumption State Budget State Budget Revision

Economic Growth 6.8% 6.4%

Inflation Rate 6.0% 6.5%

Exchange Rate (Rupiah/US$1) 9,100 9,100

3-Month Interest Rate 7.5% 7.5%

Oil Price (US$/barrel) 60 95

Oil Lifting (millions of barrels per day) 1,034 0.910

GPD (trillion rupiah) 4.306 4.484

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