Indonesia can keep budget deficit under 3% ceiling, World Bank says

By Thomson Reuters Jun 23, 2024 | 10:03 PM

JAKARTA (Reuters) – Indonesia’s budget deficit is forecast to increase this year and may widen further as President-elect Prabowo Subianto implements his policy agenda, but revenue-side reforms could keep the gap under the legislated ceiling, the World Bank said on Monday.

The deficit is forecast to widen to 2.5% of GDP this year from 1.7% in 2023 as cost-of-living measures and falling commodity prices hit the budget bottom line, the multinational lender said in its Indonesia Economic Prospects report.”The fiscal stance expanded slightly amid rising social spending and subsiding commodity windfalls,” it said.

The deficit is then expected to hold at 2.5% of GDP in 2025 as Prabowo begins implementing his campaign promises, before narrowing slightly to 2.4% in 2026.Southeast Asia’s largest economy has laws mandating that the annual budget deficit cannot exceed 3% of GDP, and setting a maximum debt-to-GDP ratio of 60% of GDP.

Concerns about the impact of Prabowo’s policies on the deficit and debt ratios have added to the pressure on the rupiah and bond yields in recent weeks. Prabowo’s aides have repeatedly said he would abide by the fiscal rules.

His flagship program of giving students free, nutritious meals will cost 450 trillion rupiah ($27.35 billion), equal to about 2% of the value of GDP, when fully implemented, according to the president-elect’s team.”Because these (social programs) are important and can further boost human capital in Indonesia, there is a need to ensure their sustainability going forward,” Wael Mansour, a senior economist at the World Bank, said in a media briefing.

“Hence, it is important to implement them gradually and within a fiscally sound way.”

The forecasts assumed Prabowo, who starts his five-year term in October, would implement the meals policy gradually and complement it with reforms that could boost tax receipts by 1% to 1.5% of the value of GDP annually.

Revenue reforms could include lowering tax thresholds, removing exemptions and improving audits, the report said.

The World Bank cautioned that global economic uncertainties remained a risk to the country’s external balance and fiscal positions.

“External shocks such as a potential intensification of armed conflicts or geopolitical uncertainty could result in a sharper-than-expected decline in the terms of trade, resulting in lower revenues and a tighter fiscal and external position,” it said.

The World Bank forecast economic growth would be 5.0% in 2024, compared with 5.05% in 2023, and then rise to 5.1% for both 2025 and 2026.

Prabowo, who is currently Indonesia’s defence minister, has pledged to boost growth to 8% within his term.

The World Bank estimated Indonesia’s current account deficit relative to GDP would progressively widen to 0.9% in 2024, 1.4% in 2025 and 1.6% in 2026, from 0.1% last year.

Indonesia’s trade surplus has already narrowed this year, with lower commodity prices reducing export receipts.

($1 = 16,455 rupiah)

(Reporting by Stefanno Sulaiman; Editing by Gayatri Suroyo and John Mair)