On Oct. 1, the oil price consolidated its downward trend by dipping below US$100 per barrel, coming down to around $75 per barrel this week.
At the same time, the US financial crisis has worsened, dragging down the rest of the world economy along with it.
In response to this, the IMF has revised down the economic outlook for 2008 and global economic outlook for 2009, stating that the US and the EU are already in or close to being in recession.
In other parts of the world, reported 3Q08 economic growth figures are already pointing downwards.
China's 2008 third quarter economic growth has come down to 9 percent, the lowest in five years. The deceleration from the 12 percent level in first quarter is rather alarming in our view. Closer to home, the Singapore economy has deteriorated severely with second quarter GDP growth of 2.3 percent reversing to a negative 0.5 percent in the third quarter.
Meanwhile, Japan, Indonesia's largest export trading partner, suffered its worst economic contraction in seven years in the second quarter of 2008, with many analysts believing it is already in recession.
With Japan, the EU, China, the US and Singapore accounting for 56 percent of Indonesia's total exports, there is little doubt that our country will be adversely impacted by the global economic slowdown through slower investment and trade.
As global investment appetite wanes under the current liquidity crunch, Indonesia's investment growth will also decelerate.
With difficulties in finding domestic and foreign financing, especially from the bond market, the Indonesian government along with the parliament has responded to the situation by revising the assumed 2009 budget deficit down to 1 percent of GDP, easing the need for the government to tap bond markets as it has done in the past to finance the deficit.
On a brighter note, all of these economic contractions globally are bringing down commodity prices including oil which has a positive impact on the Indonesian economy, helping to reduce the government budget deficit.
In the second revision of the 2009 budget assumptions, the government set the oil price to $80 per barrel compared to the previous $95 per barrel. Many analysts have said that this number is too conservative given current fluctuations in oil prices.
We wonder how many Jakarta Post readers know that the 10-year (March 1997- March 2006) average price of oil was only $30.2 per barrel.
Having said that, given the severity of the current global economic slowdown, the possibility of lower oil prices is wide open in our view. Thus, we believe the new $80 per barrel assumption by the government is just as good as any other forecast to be going on with, allowing the government to capitalize on the current momentum of lower oil prices, which does wonders for the budget deficit on the back of lower fuel subsidies.
It is interesting to write that the government is actually profiting from selling subsidized fuel at Rp 6,000 per liter. Given oil prices at $75 per barrel, the cost of oil is only Rp 5,300 based on the current exchange rate of Rp 9,800 per $1.
This means that if oil prices were to stay at $75 per barrel average next year and assuming the same 2008 premium fuel consumption target of 19.47 million kiloliter, the government could save around Rp 14.83 trillion on fuel subsidies, which could be allocated to a number of items including: poverty eradication programs, greater education spending and additional infrastructure-related projects.
In fact, lower oil prices could, in our view, play a pivotal role in the re-election of President Susilo Bambang Yudhoyono (SBY) in 2009 should he choose to lower the subsidized oil price in a period closer to the lead up to the presidential election in October next year.
The writer a research analyst at Bahana Securities
