No    : 120/HMS/2007

Date : 27 November 2007

The unrelenting climb in oil prices to the end of November 2007 has had significant  influence on the national economy. On 26 November 2007, Brent crude soared to US$95.44 and WTI US$97.70 per barrel. High international oil proces will inevitably affect national budget operations in 2007 and in 2008.

The budget outlook for 2007 remains secure even in spite of the high oil prices. Through various policy actions and in view of the current external conditions and fiscal performance, the estimated deficit outcome in the Revised 2007 Budget can be managed at about 1.3% of GDP. This comes within the targeted fiscal deficit in the Revised 2007 Budget at 1.5% of GDP.

To prepare for the 2008 budget, the Government has conducted a preliminary review in anticipation of the external factor high international oil prices. On the other hand, 2008 budget operations will also be influenced by internal factors, such as lifting of oil at 1.034 million barrels per day, consumption of subsidised fuels, the distribution and margin (alpha) in the pricing of Pertamina HSD sold to PT PLN, the fuel mix in electricity production and rising electricity sales. The influence of external factors, with projected averages of US$100 for the Indonesian Crude Price (ICP) in 2008 and Rp 9,200/USD for the exchange rate, as well as internal factors will have a direct impact on oil and gas revenues in the budget (income tax and non-tax revenue) and will also drive up expenditures (fuel and electricity subsidies and the oil and natural gas component of the Profit Sharing Fund for regions). A further effect will increased earnings by state enterprises operating in oil and natural gas, such as Pertamina. Firstly, higher oil prices are estimated to increase state revenues and grants to Rp 906 trillion. However, state expenditures will be similarly affected, rising to Rp 1,034 trillion. Therefore, in the absence of policy actions, the 2008 budget deficit could rise to as much as 3% of GDP, with inadequate budget financing. Some financial market analysts even project a 2008 fiscal deficit beyond 3% of GDP.

To anticipate this possibility, the Government plans 9 (nine) proactive actions to secure the 2008 budget as follows: (i) draw on budget reserve funds (policy measures); (ii) cutbacks in estimated natural absorption of state expenditures; (iii) use of windfall revenues from oil and gas producing regions; (iv) tighten budget priorities for line ministries and statutory agencies; (v) improvement in production parameters for fuel and electricity subsidies; (vi) efficiency improvements at Pertamina and PLN; (vii) healthier levels of tax payments and dividends from state owned enterprises; (viii) slight fiscal relaxation in 2008 accompanied by adjustments in budget financing; and (ix) counter cyclical measures to maintain economic growth momentum and macroeconomic stability.

Through these actions, additional budget expenditures can be restrained alongside action to boost revenue sources.  Through these steps, the 2008 fiscal deficit can be held at an estimated 1.8% of GDP, not far from the 2008 budget target of 1.7% of GDP.

The Government actions will not only secure the 2007 budget, but also sustain the pace of national development as envisaged in the Government Work Plan for 2008, which calls for increased economic growth and reductions in unemployment and poverty. In so doing, the Government will safeguard its development expenditure commitments, particularly for infrastructure, social empowerment programmes and regional development.

In conclusion, First, the Revised 2007 Budget is on track for a secure outcome with a below-target deficit at 1.3% of GDP. Second, after allowing for external influences (mainly from oil prices) and internal influences (changes in oil and natural gas parameters), government actions will keep the 2008 budget deficit to an estimated 1.8% of GDP. Third, the actions for managing the 2008 fiscal deficit will also help secure the achievement of the targeted 6.8% economic growth for 2008 while maintaining macroeconomic stability.

Source: Ministry of Finance