2010 DRAFT STATE BUDGET CONSERVATIVE, NO MUCH STIMULUS- July 2009

INDONESIAN COMMERCIAL NEWSLETTER

July 2009

FOCUS

2010 DRAFT STATE BUDGET CONSERVATIVE, NO MUCH STIMULUS

Toward the end of his present administration President Susilo Bambang Yudhoyono (SBY) prepares a draft state budget (RAPBN). It is a transitional bill to be implemented by the new government after the last presidential election. The new government is to start work after the president elect, the incumbent, will be officially installed in October 2009. No wonder the draft state budget is relatively conservative. One important target attracting attention is that the economy is projected to expand only 5% for 2010 or an increase of only 0.5 percentage point from 2009's target of 4.5%.

Given the success of the country in weathering the global financial crisis in 2008-2009, the government is expected to be a little more optimistic and will set more ambitious economic targets. Most economists believe the world economy would begin a rebound in 2010 as there are already strong signs of recovery. Even the international communities have shown greater confidence in the country's economic stability marked with share price hikes and rupiah strengthening toward the end of the first half of 2009. It is not too ambitious if the government has set the economic growth target at 6% for 2010.

It seems the SBY government did not want to look too ambitious. Stronger support from the House of Representatives would be needed if the government proposes an ambitious bill that carries higher risks especially at a time when the House dominated by rival parties - the Indonesian Democratic Party of Struggle of Megawati Soekarnoputri and Golkar under Vice President Jusuf Kalla, who has challenged his own boss, will end its 2004-2009 term. By proposing a conservative bill but more realistic, the SBY government hopes it would not need to waste much energy in the parliamentary debates to get the draft state budget through.

The SBY's Democratic Party led in the legislative election earlier this year and in coalition with a number of smaller parties -- PKS, PAN, PPP and PKB - the new government would enjoy support from a strong majority in the House for the next five years 2009-2014. The new government, therefore, is expected to be ready to come up with a more ambitious bill. Meanwhile, there will be greater certainty about the global economic trend, allowing the government to propose revisions of economic targets if needed.

Macro economic targets in Draft State Budget

Other economic targets set in the 2010 draft state budget included inflation set at 5% , rupiah value set at 10,000 per US dollar, Bank Indonesia key interest rate (SBI) at 6.5% , price of Indonesian crude oil in international market at US$60 per barrel and oil lifting at 965,000 barrels per day.

The SBI rate is already level with the target, even there is more room for further cut. The inflation target is quite realistic. Among the targets, the most elusive is the crude oil price. If the world's economy fully recovers in 2010, the oil prices are forecast to average more than US$ 70 per barrel.

State expenditures set at Rp 1,009 trillion in 2010

Based on the assumptions used to calculate the draft state budget and the priorities set by the government, the state expenditures in 2010 will reach Rp 1,009.5 trillion or an increase of Rp 3.8 trillion from the revised state budget (APBN) for 2009. With state income and grant target set Rp. 911.5 trillion there will be a deficit of Rp 98 trillion in 2010 or 1.6% of the country's Gross Domestic Product (GDP).

Revenues in taxes are estimated at Rp 729 trillion and non tax revenues at Rp181 trillion. Other income include grants The government plans to issue bonds and other promissory notes totaling Rp104 trillion to bridge the Rp98 trillion deficit.

Foreign financing in the form of loan is projected at Rp 57.6 trillion, but debt servicing is till larger estimated at Rp 58.8 trillion . Including resumption of loan of Rp 8.6 trillion , the total foreign financing will be minus Rp9.9 trillion .

Increase recorded only in defense budget

In the 2010 draft state budget , the spending by the central government is set at Rp699.7 trillion and the spending by all state ministries/agencies totals Rp327.6 trillion, or an increase of only Rp10.6 trillion from the 2009's spending target.

Increase is only for the defense budget - up from Rp 32.8 trillion to Rp 40.7 trillion. The budget for the public works ministry even declines from Rp 39 trillion to Rp34 trillion

There are seven ministries/state agencies to receive relatively large budgets as set in the 2010 bill as shown in the following table.

Table - 3

Seven ministries/agencies receiving large budgets for 2010

(Rp trillion)

Ministries Revised APBNP 2009 RAPBN 2010

Education Ministry 60,3 51,8

Defense Ministry 32,8 40,7

Public Works Ministry 39,1 34,3

Religious Affairs Ministry 25,1 26,0

State Police 24,6 25,8

Health Ministry 18,9 20,8

Transport Ministry 18,6 16,0

Source: RAPBN 2010

Priority in the allocation of budget in 2010 is also given to personnel expenses, subsidies , debt interest payment and goods expenses. In the 2010 bill , allocation for personnel expenses is projected at Rp161.7 trillion or an increase of Rp28 trillion (21%) from the 2009 target.

Subsidies down

Meanwhile the subsidy budget is set at Rp144.4 trillion in 2010, or 14.3% of the total; state budget. The budget is smaller than it is projected for 2009. The largest subsidy is still for energy totaling Rp 99.4 trillion including BBM subsidy making up Rp 59 trillion and electricity subsidy making up Rp 40.4 trillion .

Subsidies on energy decline substantially from Rp 57 trillion in 2009 to Rp 44 trillion. Declines are set for fertilizer subsidy from Rp 18 trillion to Rp11 trillion and tax subsidy from Rp18 trillion in 2009 to Rp13 trillion in 2010.

Conclusion

With realistic and moderate economic targets, there will be no much debate expected over the 2010 budget bill. Many would not be happy with the draft budget as it reflects less commitment shown by the government to stimulate economic growth, but it will at least not trigger long polemics.

Indeed the RAPBN gives no positive sentiment to the market, but the market will be well aware that the government is just taking safe steps for a safe passage of the transitional budget.

The real RAPBN is expected to come after the new government as a result of the recent presidential election officially take charge. Certainly the people would not expect to see a strongly legitimate government hesitates to act and tend to take a safe way to evade controversies.

After being officially installed president for another term, SBY should be ready to take as bold step to deliver the goods . Indonesia has a beneficial position amid the crisis that rocks the entire world. Indonesia has gained the market confidence that a number of economic indicators have remained positive with rising composite share price index and rupiah value and low inflation . If the condition could be managed properly Indonesia could expect to move faster ahead when the condition in the world becomes favorable. Rival countries in this region are still struggling to cope with economic contraction that would discourage foreign investors. If the government could fully capitalize on the condition , Indonesia could be the front runner in economic development.

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