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NEWS UPDATES Asean Affairs        24  March 2011

Delayed decisions on subsidies costs Indonesia

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Pushing back plans to reduce subsidized fuel usage because of worries about rising inflation is risking the country's fiscal health, analysts say.

They are worried that placing politically popular actions ahead of difficult but necessary decisions will lead to ballooning budget deficits that will be hard to finance through the bond market.

Bambang Brodjonegoro, acting chief of the Fiscal Policy Office at the Finance Ministry, said on Tuesday that shelving plans to limit use of subsidized Premium fuel would increase fuel-subsidy spending by Rp 6 trillion ($690 million) this year. The government set aside Rp 95.8 trillion for fuel subsidies in its 2011 state budget and assumed crude oil prices of $80 per barrel.

Oil prices have topped $100 per barrel, though. According to Finance Ministry data, every $1 per barrel increase over oil price assumptions swells the budget deficit by Rp 800 billion.

Juniman, an economist from Bank International Indonesia, doubts the government can maintain a deficit of Rp 124.7 trillion, equal to 1.8 percent of the nation's gross domestic product. He also worries the bond market, in which the government does most of its deficit financing, may not absorb enough bonds.

"The deficit is definitely going to get bigger. If we estimate the average crude price is about $100 per barrel for the whole year, our deficit is going to soar by Rp 10 trillion," he said on Wednesday. The deficit could grow as large as 2 percent of GDP, he added.

Finance Minister Agus Martowardojo has played down deficit worries, saying a stronger rupiah would compensate for rising oil prices.

Even without soaring deficits, Juniman said, Indonesia still has cause for concern. According to the state budget, the government must issue Rp 200.6 trillion in bonds this year.

"Every week, we need to issue up to Rp 5 trillion in bonds. If we keep forcing high target issuance, it will send a signal the government needs money, but market sentiment is shaped by concerns over inflation. I'm afraid the market cannot absorb all the bonds we throw into the market," he said.

Overloading the bond market with Indonesian debt could force the government to offer higher yields, raising borrowing costs. "This is the cost for politically favorable decisions," Juniman said.

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