Indonesia boosts spending budget by 15%

Analysts worry that Indonesia will underspend as uncertainties of full disbursion arise.

According to DBS, Indonesia's 2013 budget emphasizes greater capital spending and also offers hints of reforms on the country’s subsidy policy. The overall budget deficit is set to reach 1.6% of GDP in 2013, down from a projected 2.2% this year. The allocation for capital spending is raised by 15% to facilitate the construction of infrastructure including roads, airports and railways. Judging from previous years, it is still not clear that the full amount can be successfully disbursed.

Here's more from DBS:

In 2011, IDR141trn was allocated for capital spending, but only IDR116trn was spent in the end. This trend of underspending has generally been in place since 2005. That said, the absolute amount of capital expenditure has clearly increased. In 2011, capital expenditure rose by 44.4%, up from 5.8% in the preceding year. In 1H this year, the pace of budget disbursement has improved with total spending reaching 40% of target, compared to 33% in the previous year.

Energy subsidies will be set at IDR274.7trn in 2013, up from IDR202.4trn this year. However, the jump in budget allocation is actually exaggerated. With no fuel or electricity hike this year, the total amount of energy subsidy could be much closer to IDR300trn. In effect, to achieve the subsidy target for 2013, some reforms will have to be taken. It was proposed that power tariffs be reviewed every quarter and there were also suggestions that the fuel subsidy could be better targeted.

Earlier this year, a planned electricity tariff hike was postponed and a widely expected subsidized fuel price hike failed to materialize. Without acute price pressures (Brent crude prices above USD125/bbl for 3-4 months), a compromise reform path would likely to be taken. Several proposals that have been put up previously (such as the restriction of subsidized fuel usage) could be reconsidered. At this point, a 30% increase in subsidized fuel price is not our core scenario for 2013.