2009 budget assumptions: Oil independence

The Jakarta Post ,  Jakarta, August 20, 2008

Andry Asmoro ,  Analyst  

Indonesia's independence-day this year was particularly colorful as the government reviewed their year-to-date performance and unveiled the 2009 proposed budget, which raised the eyebrows of many businessmen, analysts and the political elite alike.

The main issue of the controversy centered around the US$100 per barrel oil assumption. While this assumption might be too bullish for some, it is not surprising to us given the recent downtrend in global oil prices and the fact that campaigning for the 2009 elections will soon begin.

At the end of the day, no one knows where oil prices will be at the end of the year, much less in 2009.

We believe $100 is just as good as any forecast, allowing the government to capitalize on the current momentum of lower oil prices, which does wonders for the budget deficit on the back of a lower fuel subsidy allocation.

Besides, budgets and forecasts are meant to be altered as we get closer to 2009, in our view.

On the external front, the U.S. economic slow down is likely to continue into 2009, slowing down with it the rest of the world and particularly the EU and China.

Recent surveys in the U.S. conducted by Duke University concluded that 54 percent of chief financial officers (CFOs) believe there is a recession in 2008 and that the country will not recover until late 2009.

This is likely to bring down commodity prices, including oil. Whether it's $100 or $90 per barrel is as good as anybody's guess in our view, particularly since we have not seen any supply shortages thus far.

If anything, we see a decline in demand as oil prices recently reached nearly $150 per barrel.

Having said that, whether the proposed oil price assumption in the budget is too aggressive remains to be seen.

Nevertheless, we see the government's economic growth assumption as realistic, set at 6.2 percent, which is in line with our estimate. The 6.2 percent economic growth could be reached assuming strong stimulation from government spending.

First semester economic activity figures prove that the economic growth was mainly driven by export, supported by commodity exports.

Thus, the risk going forward will be whether other sectors, such as manufacturing and infrastructure sectors, will be able to take up the slack amid lower commodity prices.

Thus far, the government has been consistent in terms of the 2009 growth targets as capital expenditure has increased each year. Based on Finance Ministry data, capital expenditure rose 175 percent within five years to Rp 90.71 trillion in 2009 from Rp 31.89 trillion in 2005.

But, again the perennial disbursement problems remain a risk in the development of infrastructure.

Another eyebrow-raising macroeconomic assumption is the inflation rate. Similar to this year, the inflation figure in 2009 will be mostly driven by oil and commodity price fluctuations.

What makes the 2009 inflation figure relatively different is that the election campaigns will probably kick off as early as six months prior to April next year. This is likely to inject excess liquidity into the system and could apply upward pressure on inflation.

Based on our experience of the 2004 elections, household consumption contributed on average 60 percent to GDP. We estimate the inflation rate for 2009 will be 7.8 percent, higher than the government's assumption of 6.5 percent.

In summary, despite the need to create "economic performance" for political reasons, the government has in fact given more reliable assumptions compared to the previous budgets in our view.

One thing the government must learn from the recent commodity fluctuations is not to panic and to remain "independent" of short-term oil price fluctuations.

The writer is an economist at Bahana Securities