Rising fuel subsidies will prompt the budget deficit to widen this year.
The soaring budget shortfall, despite being affordable, would subvert Indonesia’s long term sustainability efforts as it reflects no change in energy policy, encouraging present consumption over future investments.
Finance Minister Agus Martowardojo said on Thursday that the government deficit may reach 2.3 percent of the country’s gross domestic product this year, above the 2.23 percent set in the 2012 revised budget, due to increasing subsidy expenses for fuel and electricity.
“Despite the increasing deficit, this year’s budget will remain healthy,” Destry Damayanti, chief economist at Bank Mandiri, told the Jakarta Globe on Friday. “However, the quality of our budget is lower, as increasing subsidies for energy undermines sustainability for the future.
“It proves the government encourages today’s [levels of] consumption at the expense of investment,” Destry noted.
He added that the widening budget deficit may prompt ratings agencies such as Standard & Poor’s to delay raising Indonesia’s investment grade status.
Moody’s Investors Services and Fitch Ratings raised the country’s sovereign debt rating earlier this year.
“They are awaiting a substantial change in energy subsidy policy.”
The government failed to increase the price of subsidized fuel by 33 percent in March due to strong opposition from the House of Representatives.
Subsidized fuel consumption was set to 44 million kiloliters this year, raised from the initial allocation of 40 million kiloliters.
“According to our latest estimate on Sept. 18, the deficit may increase to 2.31 percent,” Agus said, as quoted by Investor Daily. “That’s already including the addition of subsidized fuel quota,” he said.
The House’s Commission VII agreed on Tuesday to the government’s request to increase the subsidized fuel allowance. The 2012 revised budget set the deficit at Rp 190.1 trillion ($200 million), or 2.23 percent of the country’s GDP.