Indonesia plans to reduce its budget deficit next year in a bid to lower fiscal risks amid global financial headwinds, President Joko 'Jokowi' Widodo said on Thursday (16/08). (Reuters Photo/Beawiharta)

Indonesia Seeks to Reduce Fiscal Risks With 2019 Budget Amid Global Headwinds


AUGUST 16, 2018

Jakarta. Indonesia plans to reduce its budget deficit next year in a bid to lower fiscal risks amid global financial headwinds, President Joko "Jokowi" Widodo said on Thursday (16/08).

The government seeks to reduce the deficit to 1.84 percent of gross domestic product in the draft 2019 budget, compared with 2.12 percent in this year's revised budget.

The Jokowi administration had a budget deficit of 2.59 percent of GDP during the president's first year in office in 2015.

Indonesia's financial sector is facing various challenges amid a global selloff of emerging-market assets. The government recently stepped up efforts to support a tumbling rupiah, as the country is also feeling the impact of the Turkish financial crisis, which has sparked fears of emerging-market contagion.

"In 2019, the government is taking a fiscal-policy approach that is [still] expansive, but measurable," the president told the House of Representatives during his annual budget presentation.

He added that the government was still committed to sustainable development and that his administration would speed up infrastructure projects and boost the development of human resources as part of the country's Fourth Industrial Revolution roadmap. He said this includes automation and wider implementation of the internet-of-things in the manufacturing industry.

Next year's budget for infrastructure spending remains relatively large, at Rp 420.5 trillion ($28.86 billion), compared with this year's Rp 410 trillion. The Jokowi administration has been consistently ramping up infrastructure spending. The budget increased to Rp 256.1 trillion in his first year as president, from Rp 154.7 trillion at the end of his predecessor's term in 2014.

Jokowi's budget for next year has been eagerly awaited by his political opponents, who accused him of mismanaging the economy, which they claim has resulted in the annual growth rate stagnating at around 5 percent. They also accused his administration of failing to protect the national currency.

Rupiah Still a Concern

The rupiah, which is among the worst performers in Asia, has lost more than 7 percent of its value against the US dollar so far this year, sparking fears that it may have a multiplier effect on the economy, as Indonesia imports a lot of its requirements, including foodstuffs and intermediary goods for the manufacturing sector.

The average rupiah exchange target rate for the entire year is set at 14,400 to the dollar, compared with around 14,600 currently. However, this is a more realistic target than this year's 13,500.

Investment bank ING said in a report on Thursday that the state budget assumption is generally "reasonable," but a stronger rupiah assumption is "reason for caution."

"A cause for concern is the possible rupiah assumption of 14,400, which is around 1.6 percent stronger than current levels. This could be difficult, unless the government and central bank are successful in reducing the current-account deficit from 3 percent of GDP in the second quarter to closer to 2.5 percent of GDP," the bank said in the report.

Record Spending Remains

Despite aiming for a lower deficit-to-GDP ratio next year, state spending is still projected to increase. Jokowi said spending will increase 10 percent to Rp 2,439.7 trillion next year, while revenue is forecast to rise 12.6 percent to Rp 2,142.5 trillion.

"The state budget is designed in a prudent, realistic and effective [way] to push development in Indonesia, while it is also anticipative in responding to domestic and global challenges," Jokowi said in his speech.

The government has set a 5.3 percent economic growth target for next year, compared with this year's target of 5.4 percent. But government officials have conceded that the growth rate may probably only reach 5.2 percent.

The inflation target is set at 3.5 percent, the same as this year.

Manageable Inflation

Jokowi said such a low level of inflation is aimed at maintaining consumer purchasing power.

"Inflation will be managed by ensuring an adequate supply of goods and services, especially foodstuffs, by improving the national production capacity and efficiency along the supply chain," he said.

The president said the government is also committed to providing social security for low-income groups.