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Indonesia unlikely to repeat spending cuts this year

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David Lawder -


Indonesia will not need to repeat last year’s major spending cut as the government’s revenue projections look “on track” amid strengthening growth, Finance Minister Sri Mulyani Indrawati said.


Indrawati said in an interview on Monday that the government would reallocate some spending within the budget to more “productive” areas that can support growth, such as land acquisition for infrastructure projects. The former World Bank managing director also insisted that Indonesia’s international banking environment was not becoming more difficult, despite a recent row over a negative JP Morgan research report.


One of Indrawati’s first acts when she returned to Jakarta as finance minister in July 2016 was to slash state spending by $10.2 billion to hold Indonesia’s deficit within a 3 per cent legal limit.


“We are not going to cut. The president is asking to reallocate more, focusing on the spending which is productive,” Indrawati said of this year’s budget, after the International Monetary Fund and World Bank spring meetings in Washington.


She said revenue projections appear “on track” as the World Bank projects Indonesia’s economic growth at 5.2 per cent this year, compared to the government’s official 5.1 per cent forecast used for budget planning, and 5.0 per cent last year.


“If there is going to be a change in the revenue it will be because of the commodity prices, like oil. We are assuming $45 a barrel, maybe it’s going to be an average of $50,” she said.


Indonesian crude grade prices ranged from $46.65 a barrel to $50.80 a barrel on Monday. Benchmark US light crude traded at $49.49. Indrawati said the government needed to boost infrastructure spending this year for some specific projects, such as hosting the Asian Games in 2018, but added, “The overall top line is not going to change.” Interest rates are another variable that could have an effect on revenues, depending on how far and fast the US Federal Reserve raises rates this year, which could affect growth, capital flows and the value of the rupiah.


Indrawati said Indonesia was much better positioned to handle Fed rate hikes than during the “taper tantrum” of 2013, when funds flowed out of emerging markets as the Fed signaled it would scale back its bond-buying efforts.


Indrawati said this time around, the Fed’s intentions have been well-telegraphed, and confidence in Indonesia’s growth prospects, its growing middle class and its reform efforts are also stronger.


“As long as this movement of the interest rates is being viewed by the market as a sign of strength of the US economy, I think there will be less possibility of volatility,” she said.


Following the growth of religious tension in the recent election of the governor of Jakarta, Indrawati said it was “not necessarily the correct projection” to assume similar issues for 2019 national elections, and added that it would have no effect on President Joko Widodo’s reform programme.


“This is still a healthy democracy, it’s a good result of democracy. People presenting what they wish, what they expect,” she said. “And for government, at the national level, we will continue doing our programme.” — Reuters


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