Fiscal Pressure

ANTARA FOTO/WELI AYU REJEKI

Dozens of students from several universities grouped in the People\'s Defense Movement (Geber) protest the fuel price increase on Tuesday (10/7/2018) at the Ciceri roundabout in Serang, Banten. They urged the government to seek a solution to stabilize the price of fuel and the rupiah exchange rate to protect the ordinary people.

The government has decided not to revise the 2018 State Budget, even though several figures do not seem realistic. The most obvious thing is the price of oil. The government has projected the price of oil to stand at US$48 per barrel in 2018. In reality, the price of oil has hovered at $71 per barrel (WTI) and $75 per barrel (Brent). The big gap created a fiscal dilemma.

The high oil price creates problems for the economy because we are a net oil importer. The problem became serious when in January-April; our oil production was only 742,000 barrels per day, far lower than the oil lifting expectation in the State Budget set at 800,000 barrels per day. So, the 2018 State Budget faces two problems related to oil: price and production volume.

Such a situation creates a fiscal dilemma for the government. On one side, if the government increases the price of subsidized fuel, there would be potential inflation that could lower purchasing power. Actually, the annual inflation rate in June 2018 at 3.21 percent was low enough and was able to accommodate any fuel- price hike. However, when people’s desire to spend is low and household spending growth is below 5 percent, then an increase in the price of subsidized fuel is not a logical choice.

ANTARA FOTO/WAHYU PUTRO A

A teller counts rupiah bank notes on Thursday (28/6/2018) at Bank Mandiri’s head office. Jakarta Interbank Spot Dollar Rate (Jisdor) data showed that the rupiah had weakened to Rp 14,271 per US dollar, its weakest over the last three years, as a result of market sentiment and fundamental factors.

Dilemmatic

For Indonesia, just like food prices (mainly rice), oil has also become a political commodity, the price fluctuation of which could affect the political climate. Twenty years ago (1998), the oil price hike contributed to the economic crisis. Thus, ahead of the political year of 2019, it is understandable that the government is careful in managing the oil price so as to not trigger problems in politics. An increase in the price of subsidized fuel is not recommended.

However, such a decision surely triggers complications. When the fuel price is not increased, the burden on the State Budget is heavier due to a bigger subsidy. Consequently, fiscal sustainability and credibility face pressure. This would create a negative perception among investors and business players in the market. Eventually, it contributed to the rupiah’s depreciation.

Given this analysis, the rupiah weakening to Rp 14,400 per US dollar basically faces three problems. Aside from oil, there are two big problems. First, the interest rate hike in the US has brought liquidity from across the globe to the US. Indonesia was also hit as shown through the foreign exchange reserve data, from $132 billion (January) to $120 billion (June).

Second, the US trade war against its trade partners, mostly China. The main target of US trade war is its main trade partner: China (US saw $375 billion trade deficit), Mexico ($71 billion), Japan ($69 billion), Germany ($65 billion) and Canada ($18 billion).

Indonesia actually sees a trade surplus of $13 billion with the US or lower than other Asian countries, such as ($32 billion), South Korea ($28 billion) and Malaysia ($25 billion). Nevertheless, the US would evaluate Indonesia’s feasibility to get tax incentive through the generalized system of preferences (GSP).

ANTARA FOTO/SIGID KURNIAWAN

Finance Minister Sri Mulyani (right), accompanied by Deputy Finance Minister Mardiasmo (left) and Head of Fiscal Policy Agency Suahasil Nazara (center), delivers a press statement on the State Budget performance on Monday (25/6/2018) at the Finance Ministry. Sri Mulyani said that the budget’s performance had strengthened since May, when the budget deficit stood at Rp 94.4 trillion, or 0.64 percent of GDP.

The problem got harder when last year we only saw a surplus of $12 billion. This year, we saw deficit of $1,021 million (January-June). Consequently, the international trade did not contribute foreign exchange reserve, meaning that it took part in reducing the competitiveness of the rupiah. If the US strips off the GSP facility, the deficit would widen.

All those problems force the government to take conservative approach in managing the fiscal. The State Budget 2019, currently in deliberation, has accommodated all those issues. The ministry and government institutions spending are set at Rp 838.6 trillion or Rp 8.8 trillion lower compared to this year. There will be weakening fiscal stimulus.

Actually, the government still has a fiscal room to move. The deficit in the State Budget 2018, for example, was set at 2.19 percent of the gross domestic product (GDP). This is the lowest deficit percentage in the past few years. Normally, we saw 2.5 percent deficit, lower than the 3 percent level.

This situation is dilemmatic. When the rupiah gets pressured, the monetary sector has no choice but to increase the interest rate. Consequently, the growth of banking credit tends to slow and is hard to raise it to above 10 percent. As compensation, the fiscal sector should be relaxed. The government spending must be more expansive. Yet, the capital for it is limited.

KOMPAS/HERU SRI KUMORO

A. Tony Prasetiantono

Thus, a conservative approach in fiscal management is unavoidable. Yet, the global economy dynamic would continue and we still have a hope.

Regarding the interest rate, who knows the US central bank, The Fed, is not in a hurry to raise the rate again this year. Isn’t the US economy in good shape?

Remember, in this world, there is almost nothing impossible. We, too, must be ready for surprises….

A. Tony Prasetiantono, Chairman of the Center for Economy and Public Policy Studies, Gadjah Mada University