Former Finance Minister Chatib Basri has warned of the possible risks of increasing the budget deficit limit to more than three percent of GDP. He said the policy could trigger a flight of foreign funds from the Indonesian capital and financial markets.
According to Chatib, increasing the deficit above the current limit is not good policy. He referred to a number of countries that have experienced an exodus of foreign funds after implementing this policy.
The economies of Turkey and Brazil, for example, deteriorated following the flight of capital, prolonging their economic slowdown. India, in contrast, managed to avoid the risk of capital outflow by lowering its budget deficit from six percent to three percent.
Talk of increasing Indonesia’s budget deficit was prompted by the low state revenue in the first half this year. Per June, state revenue and grants amounted to IDR634.7 trillion or just 35.5 percent of the target in 2016 Revised State Budget. Meanwhile, actual state spending reached IDR865.4 trillion or41.5 percent of the Revised State Budget ceiling.
As a result, the deficit in June 2016 reached IDR276.6 trillion or 1.83 percent of the GDP, approaching the deficit target of IDR296.7 trillion or 2.35 percent in the Revised State Budget.
The government is expecting additional revenue of IDR165 trillion from the tax amnesty program. But there are doubts this target will be achieved, which means the budget deficit could exceed three-percent limit stipulated in Law No.17/2003 on State Finances. Recently, there has been talk of issuing a government regulation in lieu of the Law to allow the deficit cap to be raised above three percent.
Those investors then invest their funds in emerging market countries. That is what attracted capital inflows to Indonesia, boosting the rupiah and the state bonds(SUN).
According to Chatib, Indonesia is currently in better shape than other countries, in terms of both economic growth and financial condition. Singapore and Australia, for example, only grew 2.5 percent and 2 percent. Meanwhile, Brazil contracted 3.8 percent with a budget deficit of almost 10 percent.
For these reasons, the University of Indonesia economist is concerned that raising the deficit cap will trigger capital outflows.
"(Foreign investors) trust that Indonesia’s budget deficit will not go above three percent. So there will never be a debt problem," he said in Jakarta, Thursday (28/7). If the deficit is financed by loans, the higher debt will lead to higher risks.
Looking back, in 1998, Indonesia had a debt ratio of more than 100 percent of GDP, causing the economy to crash. Today, Indonesia's debt ratio is only around 26 percent.
This low debt ratio prompted international ratings agencies to declare Indonesia ‘investment grade’. But if our debts soar out of control, the risk will increase. "We need to remember that the reason Standard and Poor’s (S&P) did not rate Indonesia ‘investment grade’, was our fiscal problems," Chatib said.
Capping the deficit at three percent will urge the government to spend their budget effectively and efficiently.
One example is the fuel oil subsidy budget cut, which is used for productive spending like infrastructure. "A budget deficit of three percent is what has been saving Indonesia in terms of investor confidence."
Chatib recognises of the widespread expectation of high economic growth. But the current growth rate of 5-5.1 percent is actually sufficient for Indonesia.The economic growth of neighbouring countries whose economies and revenues depend on natural resources is actually shrinking, with growth rates of no more than one percent.
Achieving growth of more than five percentishard work for the government, especially when it comes to boosting revenue to ensure infrastructure development can continue. “A gradual increase in economic growth would be great. But we have to be realistic about the external conditions that we are facing."