Developments in Government Finances

The state of macroeconomic conditions at the end of 2012 was not consistent with assumptions that underpinned 2012 revised budget. Uncertainty that continue to bedevil economic conditions in the domestic economy and the global economy, have constrained growth of the economy to just 6.2%, which is below the assumption of 6.5% in the 2012 revised national budget. This is in part attributable to the trade deficit registered in 2012. In addition, budget utilization or absorption rate in 2012 was 95.6%, hence below target.

The assumptions used in drawing 2013 national budget are too optimistic. This is reflected in the assumption of economic growth of 6.8%, which was based on economic conditions in 2012. The theme of 2013 national budget adopted by the Indonesian government is “strengthen the domestic economy to expand public welfare”, which conveys the message that the government is committed to enhance the resilience of the domestic economy.  Nonetheless, high uncertainty in the global economy have become a major obstacle to realize such a goal

Realizing that increasing capital expenditure is one of the ways that stimulate economic growth, 2013 national budget raised capital expenditure by 21.3% compared with 2012 national budget. The expectation is that capital expenditure can be absorbed as planned, which should help in increasing economic growth. Subsidies still constitute major portion of the 2013 national budget, which is 27.5% of total central government expenditure. Besides, expenditure on subsidies in 2013 national budget increased drastically from 2012 national budget level from IDR 208.9 trillion to IDR 317.2 trillion, which represents an increase of 51.9%.  Government expenditure for social assistance programs is another item in the national budget which registered a drastic increase of 54.1% from IDR 47.8 trillion in 2012 national budget to IDR 73.6 trillion in 2013 national budget.

Subsidies on non energy items in 2013 national budget registered an increase of 5.4% compared with 2012 national budget.  The change is attributable to an increase in expenditure on several items in 2013 national budget compared with the 2012 national budget. Such changes are discernible in the item on food subsidies which shot up by 10.2%, tax subsidies which increased by 14.9%, and seed subsidies which increased more than four times. It is essential that general public and all stakeholders have participated in monitoring and supervising various items of expenditures especially social safety net budget and subsidies which are prone to abuse. This is more so given the fact that 2013 is considered a year that is rife with political dynamics, which may end up in directing national budget funds to uses other than those stated in the national budget.

The government should pay serious attention to the adverse effect of the rising primary deficit on the fiscal balance which if not handled carefully poses the danger to undermine fiscal health as a result of paying interest on debt by contracting new loans.  Primary deficit for 2012 budget was IDR 72.32 trillion, and predicted realization was IDR 78.92 trillion, meanwhile, in 2011, there was still a surplus of IDR 8.86 trillion.  In the 2013 budget, projected primary deficit is IDR 40.09 trillion. The primary deficit is attributable to the realization of government revenues that fall short of expectations, and the rising expenditure on subsidies and government employees.  Suboptimal government revenues are among other factors attributable to the global crisis and the decline in Indonesian competitiveness. To that end, to avert rising primary deficits in future budgets, the government should increase its revenues and enhance the quality of its expenditures.

 

Developments in Fiscal Policy

In general, the value of government and private sector foreign debt has increased. In the fourth quarter 2012 the value of government and private sector foreign debt was USD 125,081 million, which is an increase of USD 1,811 million from USD 123,270 million in the previous quarter. The value was an increase of USD 18,349 million from the fourth quarter in the previous year. The total value of Indonesia foreign debt in the fourth quarter 2012 was USD 251.2 billion, which represents an increase of USD 7.3 Billion from USD 243.91 billion registered in the previous quarter, and an increase of USD 25,825 Billion from USD 225.3 Billion in the previous year. The value of government foreign debt in the fourth quarter 2012 was   USD 116.2 billion, which is an increase of USD 1,150 million from USD 115.037 Billion in the previous quarter. The value also represented an increase of USD 3,760 million from USD 112.43 Billion registered in the fourth quarter in the previous year. 

Meanwhile, in general the ratio of total value of Indonesian foreign debt to GDP shows an upward trend over the years.  In the fourth quarter 2012, the ratio was 28.60%, which is an increase of 2.91% from 25.7% for the previous quarter and an increase of 1.97% from the fourth quarter in the previous year. Thus, both government and private sector foreign debt registered an increase.  To that end attention should not only be paid to the increase in foreign debt, but also the purpose to which such debt is put.

The ratio of government debt to GDP shows a downward trend. This is reflected in the fact that while government debt was  IDR 1,975 trillion by the end of  December 2012 or  23.96% of GDP, which is decrease of  0.39% from 2011 ratio of 24.35% which was based on GDP for 2011.  Despite that, the value of government debt in 2012 shows an increase. The hope is higher growth of GDP should lead to a lower debt to GDP ratio.

By January 2013, total government bonds outstanding (SBN) was IDR 1,374.16 trillion, which is an increase of IDR 13.06 trillion from IDR 1,361.1 trillion in December 2012.  The value of SBN outstanding in 2012 constituted an increase of IDR 173.445 trillion from the value of SBN in 2011. Fixed rate bonds constitute the largest component SBN outstanding, amounting to IDR 625.093 trillion.   In January 2013, the value of Treasury Bills was IDR 21.27 trillion, which shows a downward trend from IDR 1.55 trillion registered in December 2012 and IDR 12.83 trillion in January 2012. The decrease is also shown in variable rate government bonds. On the contrary, the value of fixed coupon government bonds shows an upward trend.  In January 2013 was IDR 625.093 trillion, which was an increase of IDR 14.7 trillion from the value, registered in December 2012 and is also an increase of IDR 100.132 trillion from the value recorded at the beginning of 2012.

In general, the value of government bonds and Bank Indonesia Certificates held by foreign entities shows an upward trend. However, foreign ownership of government bonds shows an increase, the value of Bank Indonesia certificates in foreign entities shows a downward trend.  In January 2012, the value of Bank Indonesia Certificates and government bonds held by foreigners was IDR 243.61 trillion.  In January 2013 the value of foreign ownership of Indonesian government portfolio was IDR 273.35 trillion, which is an increase of IDR 2,420 Billion in December 2012 and IDR 29,740 trillion registered in January 2012. Meanwhile the value of government bonds held by foreign entities in January 2013 was IDR 273.2 trillion, which were an increase of IDR 2.68 trillion from the value registered in December 2012 and an increase of IDR 37.23 trillion in January 2012. The value of Bank Indonesia Certificates held by foreigners in January 2013 was IDR 150 Billion, which is an increase of   IDR 260 billion from the value registered in December 2012 and also a drastic decrease of IDR 7.49 trillion from the value for January 2012.  The drastic decrease in the value of Bank Indonesia Certificates held by foreigners is largely attributable to the implementation of the 6 months holding period policy by Bank Indonesia. The policy, which was issued on  13 May 2011, initially obliged one month holding period  (28 Calendar days) and was later lengthened to  6 months (182 Calendar days), stipulates that the  transfer of ownership of bank Indonesian certificates from one party to another can only be done after a holding period of six months.