I

ndecisiveness over what it needs to do with swelling fuel subsidies has forced the government to revise the state budget deficit upward, with consumers expected to have lower purchasing power.

The government has forecast the budget deficit to stand at 2.48 percent of Indonesia's gross domestic product in the revised 2013 state budget (APBN-P), higher than its earlier assumption of 1.65 percent, Deputy Finance Minister Anny Ratnawaty said on Monday.

Consequently, the Finance Ministry's fiscal agency head, Bambang Brodjonegoro, said 'the government will have to issue more government bonds' to plug the swelling budget deficit.

Nevertheless, Bambang expressed his optimism that the budget deficit could narrow to between 1.2 and 1.7 percent next year, as stipulated in the 2014 state budget draft submitted to the House of Representatives on Monday.

The budget deficit would be at such a range if the government succeeded in hiking the prices of subsidized fuel this year, Bambang said.

He referred to the latest plan to increase the price of subsidized Premium gasoline by Rp 2,000 (21 US cents) and the price of subsidized diesel fuel by Rp 1,000, from the current prices of Rp 4,500 per liter ' a plan that officials have claimed would be able to reduce the budget deficit and save the fiscal coffers at least Rp 30 trillion
(US$3.1 billion).

Should the government finally decide to issue more bonds to plug the soaring budget deficit, the bond yields would rise as a result, meaning that the government would find it more expensive to borrow funds from the bond market, says Herdi Ranu Wibowo, debt market head from privately owned BCA Sekuritas.

'But I don't think the yield increases in the market will be too high because investors still consider Indonesia's bonds attractive ' they still have high confidence in our macroeconomic indicators,' he said.

With Indonesia's budget deficit being capped by law at a maximum 3 percent and budget deficit swelling from oil imports, the government has limited capacity to maintain the country's robust economic expansion from the fiscal side.

Given the country's limited fiscal capacity, Bank Indonesia (BI), the nation's central bank, has acknowledged that it is now the job of monetary authority ' not fiscal authority ' to spur economic growth.

In the 2013 APBN-P, Indonesia is estimated to grow 6.2 percent, well below the government's previous target of 6.8 percent, according to Bambang.

Consumer purchasing power is expected to weaken as the inflation rate is adjusted upward to between 7 and 7.5 percent, from the initial 4.9 percent.

The rupiah assumption has been revised to 9,600 against the US dollar from the previous 9,300, while oil lifting was corrected to 840,000 of barrel oil per day (bpd) from its initial assumption of 900,000 bpd.

In the 2014 state budget draft, Indonesia's economy is expected to expand between 6.4 and 6.9 percent, lower than its initial forecast of between 7 and 7.7 percent, as global economic recovery will likely remain bleak next year.

Despite government downsized figures in its assumptions, analysts, however, still think that the assumptions were too optimistic.

'It will be difficult for Indonesia to experience 6.9 percent economic growth in 2014, as foreign direct investments [FDI] are likely lose momentum next year due to the regulatory uncertainty from the approaching elections,' Mandiri Sekuritas economist Leo Putra Rinaldy said on Monday.

For Indonesia's economy to expand as much as 6.4 percent would require 'all out efforts' by government officials, explained Leo, suggesting that the government accelerate the development of various infrastructure projects to spur growth.