Developments of various macroeconomic indicators show marked deviation from assumptions which were used in formulating State Budget (APBN) 2014. This is indeed is the main reason that compelled the government to submit the Revised State Budget Plan (RAPBNP) 2014, as an attempt to ensure the implementation of APBN 2014. Without making necessary adjustments, there was big chance that government expenditure could have easily have gone beyond the maximum budgetary deficit limit of 3% of GDP, which is stipulated under the law. Moreover, it is highly likely that economic growth and lifting of oil and gas for the fiscal year will be far lower predictions, while government expenditure is projected to increase sharply as a direct consequence of rising energy subsidies and still unabated depreciation of rupiah. That said, it is worth noting that macroeconomic assumptions for the annual budget merely serve as guidance in formulating state budget, rather than fixed targets which the government must achieve.
Table 1: Comparison of Macroeconomic Assumptions in Revised State Budget Plan (RAPBNP)
GDP growth assumption used in Revised State Budget Plan 2014 was revised downwards to 5.5%
Note:
* as by 11 June 2014, the parliament approved the entirety of changes effected on the macroeconomic assumptions used in formulating Revised State Budget Plan with the exception of the rupiah exchange rate which was revised to IDR/USD 11,600; as this piece is written, deliberations of Revised State Budget Plan 2014 are still ongoing
Source: Ministry of Finance, Financial Note and Revised State Budget Plan 2014
Rising burden emanating from subsidies will exacerbate the state of health of the State Budget. The value of subsidies which is expected to hover around IDR 444.9 trillion is equivalent to 33.3% of budget allocation in Changed State Budget Plan 2014. Such a staggering level, if combined with personnel expenditure is 55.9%. Consequently, budget allocation for capital expenditure is projected to experience a decrease of IDR 32.9 trillion.
Table 2: Summary of Central Government Expenditure (IDR trillion)
Allocations plan for subsidies surged by 33, %; capital expenditure suffered a 17.9% decline
Note:
* unaudited.
** Deliberations of Revised State Budget Plan 2014 are still underway by the time this piece was written
Source: Ministry of Finance, Financial Note and Revised State Budget Plan 2014
Nearly 88% of expenditure on subsidies is earmarked for energy. Such staggering amount is the summation of an increase in government expenditure on subsidies for fuels and liquefied petroleum gas (LPG) as well as electricity. The proposed budget allocations for fuel subsidies and 3 kg LPG has increasedto reach IDR 284.99 trillion or 35.2% of budget allocations in State Budget 2014. Meanwhile, subsidies on electricity is expected to reach IDR 107.15 trillion. The surge in expenditure is largely due to the revision that had to be made in the assumptions of rupiah exchange rate against US dollar and lifting of crude petroleum oil. In Revised State Budget Plan 2014, the exchange of rupiah against US dollar was revised upwards from IDR/USD 10,500 to IDR/USD 11,600 and lifting of crude petroleum decreased from 870, 000 barrels to just 818, 000 barrels per day. Meanwhile, allocations for non-energy subsidies is projected to increase by IDR 1.1 trillion. The increase is a net effect of the increase in allocations of tax subsidies of IDR 1.8 trillion and downward revision of subsidies on food by IDR 0.7 trillion.
Table 3: Composition of Expenditure on Subsidies (IDR trillion)
Proposed budget allocation for energy subsidies in the Revised State Budget Plan 2014 constitute 88.15% of overall expenditure on subsidies
Note:
* unaudited.
** deliberations od Revised State Budget Plan 2014 is still ongoing when this piece was written
Source: Ministry of Finance, Financial Note and Revised State Budget Plan 2014
During deliberations that transpired on 13 June 2014, the parliament reached an agreement to set the budget deficit at 2.4% of GDP or IDR241.49 trillion. The amount will constitute an increase of IDR66.1 trillion from the deficit that was set in State Budget 2014. In other words, such a development is not in line with government efforts and plan to reduce budget deficit in State Budget for this fiscal year. It is worth noting that the actual budget deficit in 2013 budget was 2.2% of GDP or IDR 202.8 trillion.
Deliberations on Revised State Budget Plan agreed tentatively to set the level of government revenues and expenditures at IDR 1,635.4 trillion and IDR 1,876.8 trillion, respectively. Thus, revenue target is expected to suffer a decline of 1.9% of total State Budget 2014’s allocations, or accounted for IDR 31.8 trillion. The decrease is attributable to expectations of a significant decline in revenues from taxes and non-tax sources. In the meantime, government budget allocations are expected to register an increase of 12.7%, which is IDR 211 trillion. By the time this written, there was not any official publications on the details of approved government revenues and expenditures for Revised State Budget Plan 2014. However, based on government’s proposition the increase in government expenditure due to significant increaseon energy subsidy allocation. That said, government expenditure is proposed to register a decrease as a result of cutbacks on budget allocations for ministries and government institutions which is projected to reach IDR 98.5 trillion as well as financial rebalancing fund which is in line with expected decrease in government revenues by IDR 8.9 trillion.
Table 4: Summary of Revised State Budget Plan 2014, State Budget 2014, and Realization of State Budget 2013 (IDR trillion)
During deliberations on 13 June 2014, the parliament agreed to raise the budget deficit to 2.4% of GDP
Note:
* unaudited.
** By 13 June 2014; deliberations of Revised State Budget Plan 2014 were still underway when this piece went to press
Source: Ministry of Finance, Financial Note and Revised State Budget Plan 2014
Meantime, the percentage utilization or absorption of State Budget as per quarter I-2014 is lower than that registered in the same period in the previous fiscal year. During quarter I-2013, realization of state expenditure had reached 16.2% of total budget expenditure in State Budget 2013. On the contrary, realization of state expenditure by March 2014 was still hovering around 15.6% of total budget expenditure in State Budget 2014. Nonetheless, in nominal terms, realization of state expenditure in 2014 is higher than the level attained in the same period for the previous year.
On the other hand, realization of state revenues as per quarter I-2014, was already higher than the level attained in 2013 budget during the same period. As per quarterI-2014, the state revenues had reached 17.3% of total projected state revenues in State Budget 2014. This is higher compared to the realziation of state revenues in March 2013 which posted only 16.6% of State Budget 2013. To that end, better performance with respects to realized budget revenues attests to marked success in efforts toward improving and optimization of government revenues this year. Nonetheless, the government will have to revise downwards projected revenue target in the Revised State Budget Plan 2014.
Table 5: Realization of State Revenue & Grant and Expenditure, 2013:Q1 and 2014:Q1
There is reduction in the percentage of realization of state expenditure in State Budget 2014:Q1; meanwhile realization of state revenue in State Budget 2014:Q1 shows a marked increase
Note: *Value set in the parliament during tentative deliberations; deliberations of the Revised State Budget Plan 2014 were still underway when this edition went to press
Source: Ministry of Finance, I-account (analyzed)
Indonesia’s external debt increased to USD 276.49 billion in March 2014. The level of Indonesia’s external debt grew by 9.2% (y-o-y) compared to the same period in 2013. To that end, Indonesia’s external debt in March 2014 is higher that 8% (y-o-y) charted in the preceding month. Doubtless, the increase in external debt will add more burden to the economy if the depreciation of rupiah continues.
The level of Indonesia’s external debt in March 2014 comprised of USD130.51 billion in the external debt of public sector and USD145.98 billion in private sector external debt. It is apparent from the above figures that 7.2% and 52.8% of total external debt is public and private external debt respectively. Thus, the rising level of private sector external debt, which is already larger than public sector external debt, has to be a serious concern. Private sector external debt registered an increase of 13.1% (y-o-y) in March 2014 compared with the growth of 12.8% (y-o-y) posted in the previous month. Meanwhile, public sector external debt in March 2014 registered an increase of 5.1% (y-o-y), which is higher than 3.2% (y-o-y) posted in the preceding month.
Figure 1: Indonesia’s External Debt, September 2011 – March 2014 (USD billion)
Indonesian external debt showed an increase
Source: DJPU and CEIC (2014)
There is need for the government to pay serious attention to rising external debt as well as take strategic measures to prevent the exacerbation of the problem. The level of Indonesia’s external debt has reached worrying proportions. This is discernible from an increase in debt service ratio in quarter IV-2013, which reached 52.7%. Such a level of debt service ratio, underscores the urgent need for the Indonesian government to make efforts tailored to addressing external debt management a priority. Otherwise, rising debt service ratio means that most of the country’s international reserves will be spent on paying external debt, to the detriment of financing productive programs. Rising level of external debt is also the consequence of Bank Indonesia policy on BI rate which continues to be 7.5%. Such level of reference interest induces the private sector to go offshore for borrowing due to lower rates. Bank Indonesia policy to raise BI rate is an indication that the Indonesian economy is experiencing slowdown.
Figure 2: Foreign Ownership of Indonesian Securities, October 2011- April 2014 (IDR Trillion)
Foreign ownership of Indonesia securities shows an increase
Source: DJPU, BI, and OJK (2014)
Indonesian continues to be an attractive economy for foreign investors. To that end, the interest of foreign investors is not only limited to the capital market, but also very evident in the domestic bonds markets. In April 2014, foreign ownership of government bonds had reached IDR 377 trillion, which represents 41% of the volume of bonds outstanding and an increase of 23.7% from IDR 304.72 trillion recorded during the same period last year. Meanwhile, foreign ownership of equity in March 2014 was IDR 1,645.52 trillion, which represents a decrease of 7.1% from IDR 1, 771.25 trillion recorded in March 2013. Moreover, foreign ownership of Bank Indonesia Certificates in April 2014 was put at IDR 9.9 trillion, which represents an increase from IDR 8.26 trillion recorded in April 2013.
The presence of foreign capital has been the source of controversy on a number of occasions. During economic slowdown, both domestic and foreign capital is required to stave off an even deeper decline in economic growth. However, presence of foreign capital in the economy often raises fears from local actors who consider them as threats to the existence of local industries. Another fear, which is increasingly becoming a real problem is the fear that foreign capital, especially that of short term tenor, as much as it can easily and quickly enter an economy, it can as easily and quickly exit it, sparking off liquidity shortages, slower investment, and economicslowdown. To that end, the Indonesian government continues to take measures that are aimed at strengthening the domestic capital market, deepening financial markets, which efforts are expected to increase liquidity, widen investor base, and diversification of available instruments.
Figure 3: Composition of Government Securities, November 2011 – April 2014
Government securities recorded an increase
Source: DJPU and CEIC (2014)
Issuing government securities (SBN), is the option which the Indonesian government has chosen to finance domestic expenditure. Total government securities outstanding in April 2014 was IDR 1,495.74 trillion, which represents an increase of IDR 327.83 trillion (y-o-y) (see Figure 12). In April 2014, fixed bond rate was IDR 828.32 trillion, which is an increase of IDR 173.47 trillion (y-o-y). Meanwhile, in April 2014, the level of Sovereign Sharia Securities (SBSN) was IDR 98.90 trillion, which represented an increase of IDR 23.04 trillion (y-o-y). The positive trend is an indication that interest in SBSN is rising, which also signals good prospects for the development of Islamic bond market in the domestic economy. The government has issued SBSN to reduce the state budget 2014’s deficit. Besides, the existence of SBSN is expected to attract foreign investors, especially those who hail from the Middle East to invest in Indonesia. As by April 2014, the level of foreign currency denominated bonds was IDR 405.96 trillion, which represented a decrease of IDR 2.95 trillion from the level recorded in March 2014, but recorded an increase of IDR 112.53 trillion compared to April 2013 (y-o-y). The level of government treasury bill (SPN) posted a slight decrease of IDR 500 billon in March 2014, to the level IDR 39.8 trillion, and represented an increase of IDR 18.78 trillion (y-o-y).
The need for improving government financial management is absolutely essential for the new government. The new government will face formidable challenge. Nonetheless, it is fair to be optimistic considering the fact that this is an issue that has dominated economic programs that various contestants in the elections have proposed if they are given public mandate to govern. This is the more so given the large budget allocation spent on conducting the elections which is by many accounts is aimed at searching for and identifying quality legislative and executive representatives—grew by 9.5% in real terms . The government allocated IDR 20.5 trillion for conducting 2014 elections, which is obviously higher than IDR 15.1 trillion in allocated for 2009 elections (DGB-MoF, 2014). The hope is that budget allocation for the general elections correlates positively with the quality of representatives, who the general public elect as their representatives.