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In line with the mandate to lower 2023 fiscal deficit to below 3% of GDP, Indonesia’s government has set the 2023 deficit target to 2.85% of GDP vs an estimated 3.92% of GDP this year. Macro assumptions reflect optimism on growth, with inflation to ease from prevailing levels, yet making room for uncertain global conditions. Growth was pegged at 5.3%, vs 5.1-5.4% for this year, CPI inflation at 3.3% (DBSf 2022: 4%) and 10y bond yield at 7.9% (vs current 7.03%) to allow for global volatility/ increase in domestic borrowing costs. Oil assumption was held steady at $95-105pb and rupiah at 14750/USD.
A point of focus was the allocation towards subsidies, as speculation is rife that prices of subsidised gasoline, LPG and diesel might be raised this month. This follows recent price revisions in select unsubsidised fuel types (e.g., PertaDex is up 14% on the month in Jakarta and up ~70% since Dec21). 2023 subsidy allocation was raised to IDR 297.2trn, of which IDR 210.7trn (1.1% of GDP) will be allocated towards energy (1%yoy). Total revenue assumption is a shade stronger than the 2022 estimate, whilst spending is expected to moderate. As we noted here, YTD 2022 fiscal performance is encouraging, as revenues benefit from strong resource-based receipts and tax collections and spending lags. A lower deficit next year will have a salutary impact on financing needs, with a smaller supply pipeline boding well for debt markets. With the BI unlikely to participate next year, onus is on domestic investors (banks, insurance companies, retail) and foreign investors to bridge demand-supply shortfall.
Even as markets keenly watch the start to the rate hike cycle, authorities have planned a “National Movement for Food Inflation Control” to ensure food inflation eases to between 5-6% by end-2022, considering administrative measures to cap costs of key food items. This comes as the increase in July inflation 4.9%yoy was accompanied by a 9.4% jump in food. Recent central bank rhetoric has stuck to script while staying on an extended pause, citing manageable core inflation and rupiah stability, which has lowered the need to tighten monetary conditions. Liquidity management continues to be the preferred route for normalisation efforts for the time being. We see room for modest hikes, starting Sep22.
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