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Cuts in spending leave infrastructure projects in limbo
President Susilo Bambang Yudhoyono has decided to slash a staggering Rp 100 trillion (US$8
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President Susilo Bambang Yudhoyono has decided to slash a staggering Rp 100 trillion (US$8.7 billion) from the operational budget of his ministries, a move that could trigger great uncertainty for several infrastructure projects, as the Public Works Ministry has been dealt the most drastic budget cut.
Yudhoyono issued on Tuesday a presidential instruction (Inpres), requiring 86 ministries and government institutions to tighten their belts on spending to keep the fiscal deficit in check.
According to the revised 2014 state budget, the Public Works Ministry sees its budget slashed by Rp 22.7 trillion from its previous budget of Rp 84.1 trillion; followed by the Defense Ministry (cut by Rp 10.5 trillion); and the Transportation Ministry (cut by Rp 10.1 trillion).
The President, however, had not cut the funding allocations for the Education and Culture Ministry and the General Elections Commission (KPU), whose budgets remained unchanged at Rp 80.6 trillion and Rp 15.4 trillion, respectively, the State Secretariat said in a statement.
'This [the budget cut] is our sacrifice for the new government, so that they will not encounter difficulties when entering office,' Finance Minister Chatib Basri said on Tuesday.
'It's an option that we have had to undertake to ensure a smooth transition,' he went on. 'For instance, we could just do nothing and let the new government bear the burden on the fiscal side; however, we don't want to think from the incumbent's perspective only.'
Nevertheless, the minister acknowledged that any additional slowdown in economic growth would be 'inevitable' due to the smaller levels of government spending.
The fiscal tightening was undertaken after the government saw an overshoot in subsidy spending and a lower-than-expected tax revenue collection.
A design of the revised 2014 state budget, released on Tuesday, revealed that Indonesia would see its fuel subsidy spending soar to Rp 285 trillion by the end of this year, Rp 74.3 trillion higher than its earlier allocation, as the weak rupiah drove up the cost of fuel imports.
On the revenue side, total tax collections are expected to be Rp 48.3 trillion lower than earlier estimates, falling to Rp 1,232.1 trillion this year, as the economic slowdown puts pressure on local companies' earnings.
Nevertheless, the government has succeeded in preventing the spending-revenue shortfall from widening. Thanks to the ministries' budget cuts, the revised 2014 state budget will see the fiscal deficit stand at 2.5 percent of gross domestic product (GDP) ' higher than the initial estimate of 1.7 percent but still lower than the legal threshold of 3 percent.
Still, analysts have warned that because the Public Works Ministry will be the biggest loser from the budget cuts, some government infrastructure projects may fall victim, ultimately hampering Indonesia's long-term growth potential.
'Those companies that are hugely dependent on government contracts, such as ADHI [Adhi Karya] and WSKT [Waskita Karya], will be directly impacted,' Joko Sogie, an equity analyst covering the construction sector with Danareksa Sekuritas, wrote on Tuesday in a report analyzing the budget cuts' effect on listed companies.
The lack of new government infrastructure contracts this year could potentially hit future economic growth, warned Joko, who suggested the new government should fix the over-dependence on subsidy spending, which had contributed to the budget deficit.
