JAKARTA: Indonesia's government expects a bigger budget deficit this year as spending on fuel subsidies is seen rising by a quarter over initial estimates, Finance Minister Agus Martowardojo told parliament on Monday.
The fuel subsidy bill is expected to climb to 120.8 trillion rupiah ($14.1 billion), from 95.9 trillion rupiah previously, widening the deficit to 2.1 percent of gross domestic product from 1.8 percent previously in Southeast Asia's top economy.
"Our prognosis is that government spending in the second half will be higher than in the first half, related to higher spending by the central government due to swelling subsidies and additional priority spending," said Martowardojo.
Benchmark London oil prices have averaged around $110 a barrel this year, after ending last year at under $95, and many analysts expect further price gains next year.
The government earlier this year delayed a plan to ban private cars from buying subsidised fuel that is priced at nearly half the non-subsidised rate, as it aimed to reduce inflationary pressures, despite the higher burden on the budget.
The new budget forecast has to be approved by parliament. A higher deficit would need to be funded by increased borrowing in the debt market, but analysts were skeptical on the new deficit estimate as they expected government spending in other areas to fall short of targets.
"The government estimate sounds too bearish," said Radhika Rao, an analyst at Forecast, who estimated the deficit would likely be narrower than the original 1.8 percent.
Higher-than-targeted borrowing in the first half of the year has also left the government with surplus cash, leading analysts to still expect another cut in Indonesia's government debt issuance later this year.
Economists say the G20 member needs to use its strong fiscal position not for subsidies but to splash out more cash on infrastructure building for long-term growth.
Martowardojo aims to keep a tight reign on spending as the government seeks an upgrade to an investment grade sovereign rating in the next year.
Indonesia's vice finance minister said last week the government might still limit consumption of subsidised fuel this year, though did not provide further details.
Inflation could soar above 6 percent by year-end if the government decided to limit subsidised fuel consumption, or otherwise it could slow to just above 5 percent, within Bank Indonesia's 4 to 6 percent target, said central bank deputy governor Hartadi A. Sarwono on Monday.
Copyright Reuters, 2011
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