Indonesia Pledges Budget Prudence as Ministers Avoid First Class

Indonesia will seek to rein in state spending next year to tackle a record current-account shortfall that has hurt the rupiah.

The government is aiming for a budget deficit of 1.69 percent of gross domestic product in 2014, compared with an earlier target of 2.4 percent, Finance Minister Chatib Basri told reporters in Jakarta today after the parliament approved the budget. Authorities accept growth next year will be slower, he said, with the expansion target reduced to 6 percent from 6.4 percent.

“This is a signal to the market that Bank Indonesia and the government are serious about addressing the current-account deficit issue,” Basri said. “To manage it, our macro policies must be tight” for both monetary and fiscal matters, he said.

The current-account shortfall was a record 4.4 percent of GDP in the three months through June, contributing to a 14 percent drop in the rupiah against the dollar in the third quarter, the worst performance among 24 emerging-market currencies tracked by Bloomberg. Bank Indonesia has raised its benchmark interest rate by 1.5 percentage points since early June to shore up the rupiah and stem inflation.

The rupiah rose 1.2 percent to 11,018 per dollar as of 3:34 p.m. in Jakarta, according to prices from local banks. That extended its gain this month to 5.1 percent, the most in Asia. The yield on 10-year local-currency bonds fell 138 basis points to 7.13 percent in October, poised for the biggest monthly drop since May 2009.

Energy Subsidies

The state budget assumes an average rupiah exchange rate of 10,500 per dollar next year, and inflation of 5.5 percent, Ahmadi Noor Supit, Parliament’s budget committee chairman, said today. About 282.1 trillion rupiah ($26 billion), or 15 percent of total spending, will be allocated to energy subsidies, he said. That compares with 299.8 trillion rupiah in 2013.

The 2014 budget plans total spending of 1,842.5 trillion rupiah, up 6.7 percent from this year. The increase in 2014 is smaller than a targeted 16.5 percent rise this year from 2012.

Infrastructure spending will be increased, and government ministers will cut costs by traveling business class and not first class, Basri said.

“After stability in 2014, then we can talk about growth momentum with the new government,” Basri said, referring to national elections scheduled to be held next year.

Indonesia’s economic fundamentals are improving somewhat, with the current-account deficit almost certainly past its peak and seen at 2.5 percent of GDP next year, according to Robert Prior-Wandesforde, a Singapore-based economist at Credit Suisse AG. Still, the policy stance may be complicated by the prospect of a reduction in Federal Reserve monetary stimulus.

“Our main concern from a macro stability perspective is that Bank Indonesia starts to ease policy ‘too soon’ and then has to reverse it when tapering comes back on the agenda,” Prior-Wandesforde said by e-mail today. “Basri’s comments provide only a degree of comfort in that regard.”