W

e recently met with Finance Minister Agus Martowardojo, Deputy Finance Minister Anny Rahmawati, Deputy Finance Minister Mahendra Siregar, Bank Indonesia Deputy Governor Hartadi Sarwono and director general of debt management at the Finance Ministry, Rahmat Waluyanto. The salient points of the meeting and our views are as follows:

While the government hinted that they may increase fuel price in May when the ICP reaches US$135/bbl this month, we are of the view that this is unlikely to occur due to three reasons: (1) The current downtrend in global oil prices; (2) We believe it would be too late for the government to raise fuel prices by June given inflationary pressure would be on the rise leading up to July’s back-to-school and the advent of the fasting month; (3) President Susilo Bambang Yudhoyono’s statement that fuel-price hike should only occur as a last resort.

Additionally, there is currently a legal issue surrounding the government’s plan to increase fuel price as the constitutional court has received a proposal for judicial review on the addition of article no. 6a section 7 in the 2012 revised state budget law. Note that the article is the legal basis for the government to raise the subsidized fuel price going forward. On this matter, the government is optimistic that the constitutional court will reject the proposal as the article has existed before 2012.

That said, in our meeting, we were informed that the government has set a fiscal buffer around Rp 62.4 trillion and plans to cut spending on unnecessary budget items worth Rp 19 trillion to support the need for higher fuel subsidy.

Furthermore, there is also room to optimize 2011’s undisbursed expenditures of Rp 13.6 trillion and allocate additional Rp 24 trillion coming from last year’s excess budget (SAL) to help support the government’s rising budget deficit due to higher fuel subsidy.

Based on our meeting, there is pressure on the 2012 state budget if the Indonesian Crude Price (ICP) were to remain at the upper end limit of the government’s assumption of US$120.75/bbl, as fuel consumption is predicted to reach 44–48 million kiloliters. This will result in energy subsidy (fuel + electricity) ballooning to Rp 300 trillion, much higher than the current assumption of Rp 200 trillion (exhibit 2) in the 2012 revised state budget. In such a case, the budget deficit will surge to 2.6 percent of GDP from the current 2.2 percent. Including the consolidation of the municipal budget, the overall state budget deficit could reach 3.1 percent, breaking cap set by the constitution at 3 percent of GDP.

On the back of continued uncertainties in inflationary expectations ahead, Hartadi Sarwono, the central bank’s deputy governor, stated that Bank Indonesia will continue to apply accommodative monetary policy in response to both external and domestic issues, which could adversely affect Indonesia’s economic growth. This should in turn provide foreign investors the confidence in Indonesia’s macroeconomic prospects.

The writer is an economist at PT Bahana Securities.