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Year of turmoil to test fiscal consolidation
Govt deficit target below 3.92 percent of GDP.
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espite facing many possible setbacks throughout 2022, Indonesia is still poised to accomplish its fiscal-consolidation plan in time, giving the country a better foothold to withstand whatever looming global uncertainty will throw at it next year.
In 2023, the annual-budget deficit must return to below 3 percent after being allowed to exceed the limit for the past three years, with 2022 the last year to do so as mandated by 2020 COVID-19 response law.
So far, the government has made sure the fiscal consolidation progressed smoothly with this year’s deficit projected to be around 3.92 percent of GDP or smaller, making it much lower than 2020 and 2021, when the deficit hovered at 6.09 and 4.65 percent of GDP respectively, according to the Finance Ministry.
“Our outlook: in 2022, the deficit will be much better than the projected 3.92 percent. It is possible that we can see the deficit go below 3 percent,” Febrio Kacaribu, the ministry’s head of fiscal policy agency told reporters on Dec. 1 in the House of Representatives, adding the deficit had only amounted to 0.91 percent as of October.
The ministry attributed the progress due to greater-than-expected tax revenue and a revenue windfall from high-commodity prices, which -- aside from lowering the deficit -- helped the government to slash debt issuance by half the amount initially planned.
The progress was once threatened by swelling fuel subsidy and “compensation” -- payables to state-owned energy firms -- to keep energy prices cheap amid high oil price and depreciated rupiah, albeit tripling the budget to Rp 502 trillion (US$32.14 billion). However, a decision was made to hike subsidized-fuel prices by 30 percent to avoid more damage to fiscal consolidation.
The government has set next year’s fiscal deficit to hover around 2.84 percent, not far from this year’s latest projection that might hit below 3 percent sooner than expected.
Finance Minister Sri Mulyani Indrawati explained that having fiscal discipline would allow Indonesia to hold fast against financial-market turbulence, depreciated rupiah and high-interest rates induced by tighter-monetary policy, which would all make borrowing more costly, to finance the deficit.
“If you don’t have fiscal discipline, which could act as an anchor [to maintain stability], then what may happen is that confidence [in the government] may fall apart,” Sri Mulyani told audiences on Dec. 2 during an event held in Presidential Palace, citing the example of British economy.
In response, the ministry plans to bank on unused 2022 budget to finance the deficit next year and stresses that it will not lead to a spending cut.
Read also: Govt prepares for 'turmoil' with prudent 2023 budget
Weaker revenue
Anushka Shah, vice president and senior analyst of sovereign-risk group Moody's Investors Service, said on Dec. 7 that next year would be challenging for Indonesia’s budget consolidation.
She said commodity price is projected to moderate, partly triggered by monetary tightening in many countries, posing a headwind for next-year’s growth that will also affect revenue collection needed to maintain fiscal deficit.
She projected Indonesia’s economic growth to slow to around 4.8 percent of GDP next year, much lower than the government’s target of 5.3 percent of GDP. Similarly, the World Bank, International Monetary Fund (IMF) and Asian Development Bank (ADB) have estimated lower growth for Indonesia at around just 5 percent.
Consequently, Indonesian debt affordability -- a measure that assesses how much debt a country could afford -- is expected to worsen in 2023 due to lack of increase in revenue, whereas interest payments will remain high because of the higher cost of borrowing.
“We do think that a higher rate and weaker economic growth will have an impact on fiscal metrics,” Shah said.
According to Finance Ministry data, interest payments next year hover at around Rp 441 trillion, a twofold increase from the beginning of President Joko “Jokowi” Widodo’s term and comprising roughly a fifth of central-government spending.
Radhika Rao, senior economist at Singapore-based lender DBS, wrote in a report on Nov. 9 that Indonesia’s low tax revenue-to-GDP ratio has been flagged as a long-standing constraint, which she hoped could be relieved by several measures to increase tax revenue given the added burden from extended fuel subsidy to next year’s spending.
According to Finance Ministry data, the Indonesia’s tax-to-GDP ratio has been standing at around 10 percent or less for the last five years, below the 15-percent threshold required by IMF to stimulate the economy, and also the lowest among peers.
Despite all the challenges from weaker-revenue side, both Rao and Shah believed Indonesia would still be able to close the gap to their pre-pandemic fiscal positions in 2023.
Read also: Government banks on unused 2022 funds to minimize borrowing next year
Financing challenges
Meanwhile, Moody’s Shah expected Indonesia’s debt financing to be more reliant on domestic borrowing with homegrown banks and local institutions to absorb most of its issuance, whereas shares among foreign-bond holders would continue declining given a possibly prolonged high Fed fund rate.
With the decline in foreign holders, Indonesian banks have accumulated 29.5 percent of the government’s local-currency bonds, followed by the central bank, at 20.9 percent as of the first half of 2022, whereas in the first quarter of 2020, they were only 26.9 percent and 9 percent respectively, ADB data showed.
Abdul Manap, researcher at Institute for Development of Economics and Finance (Indef), stated on Dec. 7 that an increased role in banks to finance the deficit could negatively impact the economy, arguing it could resort to making less money available for borrowers, as banks sought to disburse their money to government bonds instead.
He also expected the high interest rate on loans likely to persist in 2023, as they would need to compete with yields offered from government bonds, further slowing the transmission of Bank Indonesia’s (BI) policy rate amid a lower benchmark rate.
As banks’ role to finance deficit increase, sluggish loan disbursement was also shown by the drop in loan-to-GDP ratio that stood at 60 percent as of August this year, much lower than 68.6 percent back in 2018, Financial Services Authority (OJK) data revealed.
“We can expect loan disbursement to slow down, therefore our economic growth will be stagnant,” Abdul said.
Abdul also hoped that the government would think twice before reactivating another burden-sharing scheme beyond 2022, which is made possible by the financial omnibus law, arguing BI’s role in financing the deficit might carry risk to the economy and the central bank itself.
