The economy is increasingly uncertain, the 2024 APBN deficit is at risk of widening

Economic pressure must be anticipated so that the state's financial deficit throughout 2024 does not widen.

KOMPAS/TOTOK WIJAYANTO

Minister of Finance Sri Mulyani Indrawati, accompanied by her staff, led a press conference for the state budget for the April 2024 edition in Jakarta on Friday (26/4/2024). According to Sri Mulyani, the performance of the state budget until March 2024 is still on track. State revenues until March were Rp 620.01 trillion, state expenditures were Rp 611.9 trillion, resulting in a budget surplus of Rp 8.1 trillion.

JAKARTA, KOMPAS — The performance of state finances throughout the first quarter of 2024 was affected by domestic political dynamics as well as global financial volatility and geopolitical uncertainty. Without improvements in state revenue and expenditure, the APBN 2024 deficit is at risk of widening above the target.

During January-March 2024, realized state revenue was recorded at IDR 620 trillion, a decrease of 4.1 percent on an annual basis. Taxes as the main source of state revenue, the realization fell 8.8 percent to IDR 393.9 trillion. Meanwhile customs and excise duties fell 4.5 percent to IDR 69 trillion.

Also read: State Finances at the Beginning of the Year: Tax Payments Fall, Expenditures Swell

On the other hand, spending has actually increased. The Ministry of Finance recorded government spending rising by 18 percent compared to 2023, amounting to Rp 611.9 trillion due to the holding of elections and social aid distribution at the beginning of 2024. For comparison, government spending in the same period in 2023 was Rp 518.6 trillion.

Entering the second quarter of 2024, the global economic situation is becoming more turbulent. This is particularly following signals conveyed by The Federal Reserve or The Fed that they will maintain high interest rates for longer than originally planned. This move, which was unexpected by the market, has resulted in the strengthening of the US dollar against various other currencies, including the rupiah.

KOMPAS/PRIYOMBODO

Officials were serving foreign currency exchange at PT Valuta Artha Mas in Jakarta on Tuesday (16/4/2024). The exchange rate for the rupiah was recorded to have weakened, reaching a level of Rp 16,200 per US dollar after the 2024 Eid al-Fitr holiday.

Economic turmoil is also increasing with the escalation of conflicts in the Middle East region, following Iran's air strike on Israel on April 14, 2024. This condition further pressures the exchange rate of the rupiah which had previously weakened against the US dollar due to The Fed's decision, as well as increasing the risk of global crude oil price hikes.

A researcher from the Center for Indonesia Taxation Analysis (CITA), Fajry Akbar, stated that the continuous pressure in early 2024 must be anticipated with the right revenue and expenditure strategies. Without breakthrough revenue and careful spending, the budget deficit could widen from the target of 2.29% of gross domestic product (GDP) in the 2024 state budget.

If there is no improvement, the budget deficit will definitely widen.

"If there is no improvement, the budget deficit will definitely widen. "Because, until this March, the performance of tax revenues (taxes and customs) contracted to minus 8.2 percent, while the assumed increase in the target tax revenues in the 2024 APBN was 9 percent," said Fajry, Sunday (28/4/2024).

Two sides

The country's financial performance was not ideal during the first quarter of 2024, and it was further burdened by the global economic conditions that could further press down the exchange rate of the rupiah and increase the world crude oil prices. Both of these indicators, exchange rate and oil prices, have a significant impact on the energy subsidy burden that must be borne in the state budget.

In order to prevent further depreciation of the rupiah, Bank Indonesia decided last week to increase the benchmark interest rate by 25 basis points (bps) to 6.25 percent. The last time BI raised the benchmark interest rate was in October 2023 to 6 percent.

However, the increase in BI's benchmark interest rate is like two sides of a coin. On the one hand, in macro terms, BI's monetary tightening policy is expected to attract capital into the Indonesian financial market and stabilize the rupiah exchange rate. On the other hand, there is a risk of weakening the domestic economy, especially in the real sector and people's purchasing power.

Also read: Symptoms for the Increase in Benchmark Interest Rates

Fajry stated that the fiscal risks from the financial sector need to be anticipated, especially in the form of rising interest rates and credit tightening. The implications are pressure on the Value-Added Tax (VAT) which is one of the main contributors to tax revenue.

"The increase in interest rates will lead to an increase in Final Income Tax (PPh). However, if it impacts consumption and purchasing power, it will be dangerous for the performance of DN VAT," he said.

However, he is still optimistic that state finances will improve after being quite "drag" at the start of the year. "Hopefully there will be an improvement in revenue performance in the second quarter after there was an incidental increase in spending due to the election at the beginning of the year," said Fajry.

Energy subsidies

Director General of Budgeting at the Ministry of Finance, Isa Rachmatarwata, said that the government will make every effort to manage the state budget as well as possible so that there is no significant widening of the deficit beyond the target throughout this year. However, he admitted that the performance of the state budget this year will not be as good as last year's.

Our APBN deficit is still positive (surplus), but for the next three quarters we must respond carefully.

One of the risks of widening the deficit comes from the potential for energy subsidy budgets to increase due to the escalation of geopolitical tensions in recent times. Indonesia's crude oil price (ICP) as of April 12, 2024 reached a recorded 89.51 US dollars per barrel, well above the government's macro assumption of ICP price set in the 2024 State Budget at 82 US dollars per barrel.

The realization of the exchange rate of the rupiah has also exceeded the assumption in the 2024 State Budget. The assumed exchange rate is IDR 15,000 per US dollar. Meanwhile, as of April 24, 2023, the rupiah has reached IDR 16,161 or an average of IDR 15,732 per US dollar. The current exchange rate of the rupiah has depreciated by 4.83 percent compared to its position at the end of 2023.

KOMPAS/FAKHRI FADLURROHMAN

The queue of residents lining up to fill up their fuel at a public fueling station in Kemayoran, Central Jakarta, on Sunday (24/9/2023). Due to the ongoing trend of rising global oil prices, the burden on the national budget may increase.

Isa says that the government is still closely following the developments in world crude oil prices. The Finance Minister has the right to adjust the amount of energy subsidies if global oil prices exceed assumptions.

"On the other hand, we also have the potential to receive increased revenue through oil and gas income if the exchange rate and ICP rise. Therefore, this may provide flexibility for the Minister of Finance to relax the budget for subsidies," said Isa.

Previously, Minister of Finance Sri Mulyani Indrawati said the government would continue to pay attention to the situation in the financial markets which were affected by the dynamics of the global situation. Therefore, the government will remain careful in managing financing or debt strategies amidst the declining rate of revenue at the beginning of the year.

"These are quite dynamic times due to changes in exchange rates, interest rates, yields on government securities, as well as global shocks originating from developed countries. "So far, our APBN deficit is still positive (surplus), but for the next three quarters we must respond carefully," said Sri Mulyani.