Indonesia’s 2016-17 budget focuses on cautious economic expansion-
Assuming an expansionary fiscal policy stance, the Indonesian government has formulated the budget for 2017 to lay emphasis on fiscal consolidation in terms of revenue and expenditure targets. It is centred on three key policies, namely, a taxation policy that will support economic growth, a spending policy that will emphasise productive and priority spending (like on infrastructure) and a financial policy to improve resilience and risk management by maintaining the deficit and debt ratios.
Realistic budget
The budget reflects expectations of sluggish growth in 2017 amidst global economic uncertainties and lacklustre domestic performance. Pragmatic in approach, it is designed to be credible and efficient in the sense that it no longer sets ambitious growth targets like that in previous years. The budget 2017 targets a growth rate of around 5.3 per cent, not much different from this year’s target of 5.2 per cent.
Overall, the 2017 budget projects a soaring fiscal deficit as a consequence of lower-than-expected tax revenue alongside the commitment to maintain spending for national priority programmes such as infrastructure and social assistance programmes. The government estimates that the budget deficit will reach Rp 333 trillion, or 2.41 per cent of gross domestic product (GDP), in 2017.
Focus on infrastructure
Despite the lower expenditure target set for 2017, the budget laid out six priorities, including infrastructure development and inter-regional connectivity, expenditure on various priority areas and more accurate subsidy disbursements. There has been an increase in spending allocations for the infrastructure sector since 2015. In 2017, expenditure on the sector is estimated to increase by 11 per cent, reaching Rp 347 trillion (17 per cent of total state budget or 3 per cent of GDP).
The Ministry of Public Works and Housing, which deals with most infrastructure projects, is slated to obtain the largest spending allocation again with Rp 105.6 trillion, higher than the Rp 97.1 trillion earmarked in 2016. Similarly, there has been a 14 per cent increase for the Ministry of Transport from Rp 42.9 trillion as per the revised state budget 2016 to Rp 48.7 trillion in the draft budget 2017. Infrastructure projects targeted in the budget include the construction of 815 km of roads, 9,399 km of bridges and 14 new airports among others.
Despite the large allocation, however, these ministries seem to have problems with disbursement and programme execution. For instance, the disbursement rate of the Ministry of Public Works and the Ministry of Transport as of July 2016 is only around 29 per cent and 28 per cent respectively. This has been partly caused by delays in land acquisition and by internal administrative processes. Lower commodity prices have led to revenue shortfalls this year, prompting the government to adopt a tax amnesty plan that the central bank estimates will boost state coffers by Rp 53 trillion.
More PPPs required
Indonesia’s infrastructure is less developed when compared to that of its peers in the region. The country needs as much as Rp 5,519 trillion in the period 2015-19 dedicated towards infrastructure projects including energy and transport. The state budget can finance about 40 per cent of this. With such a humongous investment requirement, the country’s infrastructure drive will eventually stutter without greater private-sector participation. Although the government has bolstered the capacity of state-owned enterprises (SOEs) to finance projects, SOEs alone will not be able to deliver far-reaching plans to address the country’s infrastructure problems.
Potential private sector participants have so far been put off by the uncertain regulatory environment and bureaucratic delays. The government has responded by introducing a number of programmes to give SOEs the financial capacity to plug some of the gaps. Most notably, it injected more than Rp 17.5 trillion of new equity into infrastructure-related SOEs – such as contractors, airport and port operators, and power generators – in 2015, and has budgeted for another Rp 35 trillion in 2016. However, public finances are already a constraint on this strategy. There is no provision in the draft budget 2017 for the injection of new equity capital into infrastructure-related SOEs. In another move, the government has passed certain provisions that allow the state to guarantee borrowings by SOEs from international financial institutions for certain priority projects.
Despite the sound credit metrics and relatively stable income of SOEs, most will still generate negative cash flow in the short to medium term, as they have large capital expenditure plans and must pre-fund most of their projects. They are in a weak position to lock up large amounts of extra capital in projects with long investment horizons. A debt-fuelled increase in infrastructure investment by SOEs, hence, is not a sustainable solution beyond the short term.
Therefore, public-private partnerships (PPPs) will need to be forged if the government is to fulfil its infrastructure development agenda. Towards this end, the government has taken steps to tackle process inefficiencies and mitigate the economic risks faced by investors. In 2016, it revoked more than 3,000 regional regulations that contradicted national rules or deterred investment. Land acquisition has also been made easier.
Conclusion
Industry experts welcomed the government’s efforts to maintain an expansive fiscal policy to increase production capacity. They believe that the multiplier effect of government spending will not be big, but it will be in line with the growth assumption for 2017. Moreover, the effects from this year’s implementation of economic packages will help achieve the growth target, despite smaller revenue and spending outlooks.
There have been few successful examples of PPPs for infrastructure development in Indonesia. This is because investors are wary of engaging in costly infrastructure projects with no return foreseeable in the medium term. Moreover, the economic slowdown in Indonesia that occurred after 2011 (partly due to heavily falling commodity prices) has strengthened the negative sentiment that have dampened investment. Therefore, the government must create conditions conducive for private investment to achieve a breakthrough in infrastructure development. Strong political will and well-structured projects are critical factors in driving forward bottlenecked projects.
