Indonesia Pledges Budget Prudence as Ministers Avoid First Class

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.”

To contact the reporters on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net; Neil Chatterjee in Jakarta at nchatterjee1@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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