State Budget Review: Indonesia Proposes the Revision This Month

Finance Minister Sri Mulyani Indrawati explained the progress of 2018'2 State Budget - Photo by Finance Ministry

JAKARTA (TheInsiderStories) – Ministry of Finance (MoF) of Republic Indonesia will propose the revision of the 2018’s State budget to the parliament by the end of June to better reflect the recent development.

The current state budget assumption sets Indonesia’s growth at 5.4 percent, inflation at 3.5 percent, average exchange rate at Rp13,400 per U.S dollar. It also estimates the average the 3-month treasury bills rate at 5.2 percent, Indonesia Crude Price (ICP) at $48.0 per barrel (bbl), oil lifting at 800,000 bbl/day and gas lifting at 1,200 thousand barrels of oil equivalent per day (BOEPD).

Last April, Finance Minister Sri Mulyani Indrawati has sent a signal to revise the macro assumption of foreign exchange, oil price and the production. She indicated government plans to revise the average oil price assumption to around $58-$65/bbl from currently $48/bbl.
Given the high volatility of oil prices and Indonesia’s position as a net oil importer with a daily import need of more than 800,000 bbl, the period of low oil prices–below $50/bbl–which lasted until the end of 2017, has indeed been highly fortuitous for the President Joko Widodo’s administration.
Somehow, considering international oil prices are rising, raising gasoline price is the only way to meet the government’s energy subsidy spending target that is set in the 2018’s State budget. The government emphasizes that the higher-than-estimated crude oil price will not destabilize the State Budget.

But the minister argued, steadily rising of global oil price is expected to stimulate this year’s State budget revenues. With a total revenue target of Rp1,894 trillion ($134.33 billion), the government aims to achieve 10.1 percent growth in oil and gas tax revenues this year.

Indrawati explained, the realizations of macro economic indicators until end of May 2018 inline with the government expectation. The economic growth at 5.06 percent, inflation 1.67 percent, the interest rate on the 3-month treasury bill averaged 4.23 percent, ICP at $65.8 per barrel followed the trend of oil prices in international market.

Furthermore, she said, the rupiah weakened to the level of Rp13,714 per U.S dollar until May while oil price going higher compared to an average of $50/bbl in 2017. Meanwhile, oil lifting in the first four months of 2018 averaged 742,000 bbl/day or falling short of the target and gas lifting averaged 1,138,000 BOEPD.

Following the current situation, some analysts warned government to pay attention to fuel subsidies that will increase in line with world crude oil price movements to the level of $70/bbl. Government itself has emphasizes that the higher-than-estimated crude oil price will not destabilize the 2018 State budget.

(Graphic: The Insider Stories)

The trend of low price of oil in the past three years has hampered investment activity in upstream and downstream industry. A lack of drilling success and commercialization issues have weakened Indonesia’s outlook and spending is likely to drop further.

Indonesia’s crude oil output reached around 1.7 million barrels per day in the mid-1990s, but with just a few oil fields discovered in the western part of the country, production has dropped by half in the past decade.

On the other hand, government subsidies that have been realized as of May 2018 reached 39.03 percent or Rp60.97 trillion of the total budget. Meanwhile, the energy subsidy amounted to Rp49 trillion or grew 52 percent of the subsidy in May 2017.

Exceed that, oil import also make the country’s trade balance in May 2018 records a deficit of $1.52 billion, decreasing compared to the trade balance deficit in the previous month of $1.63 billion. With such development, cumulatively from January until May, Indonesia’s trade balance records a deficit of $2.83 billion.

Bank Indonesia said the trade balance deficit closely relates to the increasing activities in production and investment, in line with the improving domestic economic prospect and influence of increasing price of imported goods.

Going forward, the central bank saw the trade balance performance is estimated to improve in line with the continued global economic recovery and high price of global commodities. Such development will support the improvement of economic growth prospect and current transaction performance.