Fiscal Update Indonesia: Government Wants to Revise 2016 State Budget

So far in 2016 Indonesia's average crude oil price stands at USD $31.95 per barrel, far from the USD $50 per barrel crude price that was set in the 2016 State Budget. Although global oil prices (Brent crude and West Texas Intermediate) have been climbing toward USD $50 per barrel, the summer is set to start in the United States and this usually leads to lower oil demand, implying downward pressure on prices (ahead of and during winter the opposite phenomenon occurs).

Moreover, the Organization of the Petroleum Exporting Countries (OPEC) refrained from implementing an oil freeze - or other efforts to curb the cartel's oil output - at Thursday's meeting. The failure to achieve such an agreement is mainly caused by the reluctance of Iran to cut its oil output as the nation is eager to gain market share after international sanctions had been lifted.

Markets had already expected this outcome at the OPEC meeting and therefore oil prices did not decline on Friday (03/06). Brent crude futures in fact rose 15 cents to USD $50.19 per barrel, while benchmark US West Texas Intermediate crude futures climbed 9 cents to USD $49.26 a barrel. However, there remains few - to none - expectation that oil prices can raise much higher in the foreseeable future.

Meanwhile, the Indonesian government also expects to see lower-than-estimated oil and gas production in Indonesia (see table below). This implies that tax collection in the oil and gas sector falls accordingly. However, Minister Brodjonegoro has high hopes for the Tax Amnesty Bill (which still needs approval from the House of Representatives). If this bill can be implemented this year - perhaps as soon as August - then it would raise non-oil and gas tax collection this year.

Indonesian Macroeconomic Assumptions in the 2016 State Budget:

	Original Budget        2016	Proposed Revisions 2016 State Budget
GDP Growth annual percent change	5.3	5.1
Inflation annual percent change	4.7	4.0
Exchange Rate IDR/USD	13,900	13,500
Government Revenue in IDR trillion	1,822.5	1,734.5
Tax Revenue in IDR trillion	1,546.7	1,527.1
Income Tax Oil & Gas in IDR trillion	41.4	24.3
Non-Tax Revenue Oil & Gas in IDR trillion	273.8	205.4
Treasury Bills Interest Rate 3-month, percent	5.5	5.5
Crude Oil USD $ per barrel	50	35
Oil Lifting in barrels per day	830,000	810,000
Gas Lifting barrels of oil equivalent/day	1,155,000	1,115,000

Considering the financial context, Brodjonegoro proposes to widen the government's budget deficit to 2.48 percent of the nation's gross domestic product (GDP), from 2.15 percent of GDP in the initial budget. To fund this fiscal deficit in the 2016 State Budget, the government plans to issue additional bonds this year.

Next week the parliament's Budget Committee (Banggar) is scheduled to discuss the proposed revisions to the 2016 State Budget.

Those who are concerned that lower-than-estimated government revenue undermines the government's commitment to its ambitious infrastructure development targets can be relieved. The government in fact proposes to increase funds allocated to housing and public facilities from IDR 35 trillion to ID 38 trillion. This also includes funds to be spent on facilities for the 2018 Asian Games that will be organized in Jakarta and Palembang.

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