Indonesian President Susilo Bambang Yudhoyono on Thursday announced plans to keep the budget deficit below 3 percent, a target made harder by a parliament decision against an immediate rise in subsidised fuel prices.
Yudhoyono’s plans included limiting consumption of subsidised fuels, boosting state revenue and cutting government costs, he told a forum of ministers and regional leaders. He gave no details of the plans or dates for possible implementation.
“The government could look for new debt to cover the deficit but it is not an option… These three are the main elements of our solutions to guard the economic growth and state budget and our fiscal (health),” Yudhoyono said.
Parliament in March rejected a government plan to raise subsidised fuel prices, which are the lowest in Asia. Instead it gave the government of Southeast Asia’s largest economy authority to raise prices under certain conditions.
That decision could hurt the state budget and helped convince ratings agency Standard & Poor’s on Monday not to raise the country’s sovereign rating to investment grade.
S&P said it had seen some “policy slippages” from Indonesia as it held the country’s rating one notch below investment grade.
The agency said on Thursday Indonesia’s subsidy regime remained its Achilles’ heel despite public debt declining steadily because of low fiscal deficit and high nominal GDP growth.
“Indonesia’s subsidy reform is still a work in progress. We expect that the recent pause on this reform path is just that, not a halt or a reversal,” S&P credit analyst Agost Bernard said in a report.
In its state budget endorsed by parliament last month, the government revised upwards the deficit to 2.2 percent of the GDP from 1.5 percent.
Parliament in March gave the government power to raise fuel prices should the benchmark Indonesian crude price rise 15 percent above a $105-per-barrel target over a six-month period. Between October and March, the ICP averaged $116.52, or 11 percent, above the target, data from the Energy Ministry shows.
A fuel price hike will boost inflation though growth likely remains sturdy at 6.1 percent this year, according to a Reuters poll in April. The government expects a higher growth rate at 6.5 percent.
Since S&P’s decision on Monday, investors have sold more Indonesian bonds than they have bought, according to the debt office.
Analysts say Indonesia should wean consumers off costly subsidies, control inflation and spend more to replace its ageing roads and overloaded ports to reach 7 percent economic growth targeted by Yudhoyono.