T

he government is moving to prioritize stability next year in the face of potential downside risks generated by turbulence in world politics and economics.

The government and the House of Representatives Commission XI overseeing financial affairs recently commenced discussions on the details of the proposed 2019 state budget.

During one session recently, Finance Minister Sri Mulyani Indrawati said uncertainty loomed over the global economy, which according to International Monetary Fund (IMF) projections is estimated to expand by 3.9 percent in 2018 and 2019.

The risks came from policy normalization by the United States Federal Reserve — which is expected to continue tightening its monetary policy next year — as well as uncertainties surrounding the escalating trade tensions between the US and China, Sri Mulyani said.

“We are still facing in 2019 [uncertainty in the] global environment, such as [the Fed’s] interest rate hike and the trade war, which exposes global economic growth to downside risks,” she said.

Sri Mulyani added that such risks prompted the government to prioritize stability while taking countercyclical measures to support economic growth, which has recently enjoyed an upward momentum.

Commission XI member Andreas Eddy Susetyo welcomed the government’s moves to prioritize stability amid external uncertainties.

“In the process of seeking a new equilibrium, the policy priority for stability is surely a must, even if it does impact economic growth,” said Andreas at the meeting.

The government aims for the economy to expand by 5.3 percent next year on the back of strong growth in consumer spending and investments. The target, however, was lower than this year’s 5.4 percent target.

The rupiah is assumed to trade at Rp 14,400 per US dollar in 2019 on average, above the range previously agreed between the government and the House’s budget committee (Banggar) of between Rp 13,700 and Rp 14,000 per dollar.

As of Monday, the rupiah was trading at Rp 14,835 per dollar, lower than the Rp 14,884 level seen at the end of last week, according to the Jakarta Interbank Spot Dollar Rate (JISDOR).

The minister explained that the latest developments in the global economy, including the sharp depreciation of the Turkish lira and Argentinian peso, prompted the government to put forward a lower rupiah level.

She added that the widening current account deficit (CAD) this year, coupled with the declining surplus in the capital and financial accounts, meant that the rupiah would remain vulnerable to depreciation triggered by capital outflows.

The CAD swelled to US$8 billion in the second quarter of this year from only $5.7 billion in the first quarter. The latest figure is equal to 3 percent of gross domestic product (GDP).

The government has rolled out several measures intended to narrow the deficit, such as expanding the use of 20 percent blended biodiesel (B20) to cut fuel imports, and issuing a regulation on an additional import tax on 1,147 consumer goods deemed nonessential to the economy, or have local equivalents.

Bank Central Asia chief economist David Sumual said the government’s overall proposal for the 2019 state budget, particularly the fiscal deficit outlook, was realistic and would be appreciated by investors.

“They [investors] usually look at the fiscal deficit and it is important for them that going forward, the government wants to try to get the primary balance in surplus, which reflects the government’s commitment to maintaining discipline on the fiscal side,” said David.

The government expects the deficit to narrow to 1.84 percent of GDP next year, from the 2.12 percent deficit that was projected for this year.

David, however, pointed to a movement in global oil prices as one indicator that could cause uncertainty next year given a potential increase in geopolitical tensions in the Middle East, in addition to a fear of contagion from another emerging market rout.