Indonesia: Fiscal spending on the rise – UOB

Economist Enrico Tanuwidjaja and Haris Handy at UOB Group assessed the fiscal scenario in Indonesia.

Key Quotes

“In response to the coronavirus (COVID-19) pandemic, the Indonesian government announced Government Regulations in Lieu of Law (Perppu) No. 1, 2020 on 31 March 2020, upon which allowing the circumstantial lift of the fiscal deficit cap of 3% of GDP and consequently increasing the fiscal deficit target to 5.07% of GDP… from previous revised target of 2.50% (1.76% initially). The new regulation allows the government to exceed the self-imposed budget deficit cap (stipulated in the 2003 state finance law) for 3 consecutive years from 2020 to 2022. Our current assessment shows a significant increase in the need of fiscal financing as compared to the previous one stipulated in the State Budget 2020. We also view that the potentially higher financing needs will go beyond this year and into at least 2022.”

“Using the 2020 State Budget revision, we estimate that the gross financing needs will surge by around 88.2% from IDR741.8tr to IDR1,396.4tr.”

“As there is still a huge fiscal financing required this year and potentially extending beyond 2020, more avenues for fiscal financing is duly needed. The government could consider alternative external funding sources by tapping into the neighboring markets with reasonably good liquidity (such as Singapore and Hong Kong) and consider issuing bonds in these currencies. While the BI’s cap to buy in the primary market at 25% of bond issuance might increase temporarily in the near future coupled with the use of funds from MoF’s previous unspent budget, we are cautiously hopeful that foreign demand would return in H2 2020; alleviating the financing needs from the local investor and hence lowering the risk of crowding out effects. However, to err on a more cautious side, the financing of the fiscal deficit needs to consider beyond a myopic view and look more into an extended period, especially given the looming uncertainty surrounding the COVID-19 and the economic fallouts in the aftermath.”