Cablegate: Indonesia - 2006 Budget Revisions

VZCZCXRO3648
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #9526/01 2090827
ZNR UUUUU ZZH
R 280827Z JUL 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 7987
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 9933
RUEHBJ/AMEMBASSY BEIJING 3546
RUEHBY/AMEMBASSY CANBERRA 9776
RUEHUL/AMEMBASSY SEOUL 3708
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 04 JAKARTA 009526

SIPDIS

SIPDIS

DEPT FOR EAP/MTS AND EB/IFD/OMA
TREASURY FOR IA-SETH SEARLS
COMMERCE FOR 4430/GOLIKE
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO
DEPARTMENT PASS EXIM BANK

E.O. 12598: N/A
TAGS: EFIN EINV ECON PGOV ID
SUBJECT: INDONESIA - 2006 BUDGET REVISIONS

REF: JAKARTA 8006

1. Summary. On July 12 the Minister of Finance presented
the Parliament Government of Indonesia's (GOI) revisions to
the 2006 budget. Significant changes include an increase in
international oil price assumption to USD 62/barrel from USD
57, avoiding last year's mistake of clinging to an low oil
price assumption in a global environment of rising prices.
The GOI expects revenue-to-GDP of 13.6 percent in 2006.
Despite double digit inflation in the first half of the
year, the inflation estimate remained unchanged at 8
percent. The interest rate assumption rose to 12 percent,
from 9.5. Government spending for 2006 has been slow, with
only 38 percent disbursed by early July. The budget deficit
prediction rose to 1.3 percent of GDP from 0.7 percent.
Bank financing, government bonds and donor loans and grants
will cover Indonesia's budget deficit. End Summary.

2. Note: We use the Rp 9,210/USD market exchange rate on
July 14 throughout this report, which is slightly stronger
than the GOI's budget assumption exchange rate of Rp
9,300/USD. The GOI fiscal year runs on a calendar year
basis. End Note.

Revised Forecasts
------------------

3. On July 12, the Minister of Finance (MOF) presented to
Parliament's Budget Committee, mid-year revisions to the
2006 budget. In anticipation of higher government spending
to help spur growth, the GOI increased this year's budget
deficit estimate to 1.3 percent of GDP from 0.7 percent.
The MOF also revised the oil price assumption upward to USD
62/barrel from USD 57. Observers see this as the GOI's
attempt to avoid last year's mistakes. In 2005, the GOI
stood by a low oil price assumption in a rising global fuel
price environment, leading to concerns about the swelling
fuel subsidy and fiscal sustainability. The revisions for
2006 include a stronger exchange rate of Rp 9,300/USD
instead of 9,900, and a higher benchmark interest rate of 12
percent up from 9.5 percent. Despite double digit inflation
in the first half of the year, the inflation estimate
remained unchanged at 8 percent.

-----------------------------------
Table 1: FY 2006 Budget Assumptions
-----------------------------------
Assumptions 2005 2006 2006
(Proposed Revision)
--------------------------------------------- ------

Real GDP growth (1) 6.0 6.2 5.9
CPI inflation 8.6 8.0 8.0
USD/IDR (avg) 9,800 9,900 9,300
3-month SBI rate (avg) 8.4 9.5 12.0
Budget deficit (2) 0.9 0.7 1.2
Average oil price (3) 54 57 62
Oil production (4) 1,075 1,050 1,000

(1) In percent
(2) As percentage of GDP
(3) In USD per barrel
(4) In million barrels per day

More Tax Revenues
-----------------

4. Overall, revenue (including foreign grants) is expected
to reach Rp 651.9 trillion (USD 70.8 billion) in 2006, an
increase over the Rp 625.2 trillion (USD 67.9 billion)
previously estimated. MOF revenue projections consist of
tax receipts of Rp 423.5 trillion (USD 46 billion), non-tax
revenue of Rp 224.5 trillion (USD 24.4 billion) and grants
of Rp 3.9 trillion (USD 423.5 million). The revised budget
predicts the revenue-to-GDP ratio will rise to 13.6 percent,
an increase over last year's 13.3 percent. The budget also
assumes declining international trade tax revenues due to
tariff harmonization and international treaties.

JAKARTA 00009526 002 OF 004

--------------------------------------------- ---
Table 2: FY 06 Revenues (in trillions of Rupiah)
--------------------------------------------- ---
Items 2005 2006 2006
(Proposed Revision)
--------------------------------------------- -----
Domestic Revenue 532.7 621.6 648.0
- Oil and gas 175.8 183.7 193.8
- Non-oil and gas 356.9 437.9 454.2
Foreign Grants 7.5 3.6 3.9
Tot. Revenue/Grants 540.2 625.2 651.9

2005 Carry-Over Spending
------------------------

5. On the expenditure side, the revised budget estimates
show subsidies of Rp 104.3 trillion (USD 11.3 billion)
mainly for fuel, and interest payments of Rp 83.5 trillion
(USD 9 billion), of which interest on domestic debt takes Rp
58.4 trillion (USD 6.3 billion). The GOI postponed plans to
increase electricity tariffs and continues to prop up the
insolvent, state-owned electricity firm PLN. On the upside,
however, Jakarta was able to revise downward interest
expenditures for foreign debt due to rescheduling. On June
28, Finance Minister Sri Mulyani Indrawati announced that a
fiscal surplus was likely in the first half of the year,
despite the central government's attempt to stimulate the
economy by "front loading" 2006 spending, including
disbursing unspent funds of more than Rp 10 trillion (USD 1
billion) left over from the 2005 budget.

2006 Spending Slow
------------------

6. The central government's budget execution in first
quarter 2006 was better than in 2005 but lower than the GOI
had planned. The inability or unwillingness of regional
governments to spend the funds disbursed to them by the
central government--in 2006 amounting to fully 32 percent of
total government expenditures--remains a concern because it
creates a drag on the economy and undermines the Finance
Ministry's control over fiscal policy execution. By July 7
only 38 percent of annual 2006 budget expenditures had been
spent. Analysts blame regional under-spending on the slow
pace of bureaucratic reform and on President Susilo Bambang
Yudhoyono's tough fight against graft, which has alarmed
local officials to the point that they are refraining from
involvement in project procurement. A surge in spending is
now expected in the second half of the year as ministries
rush to spend their budgets.

---------------------------
Table 3: FY 06 Expenditures
(in trillions of Rupiah)
---------------------------
Items 2005 2006 2006
(Proposed Revision)
--------------------------------------------- -----
Expenditures 565.1 647.7 689.5
-- Central govt. 411.7 427.6 470.2
- Routine 103.5 135.1 134.2
- Capital 54.8 62.9 67.0
- Interest 61.0 76.6 83.5
- Subsidies 119.1 79.5 104.3
- Social 30.0 36.9 37.2
- Others 43.4 36.5 43.9
-- Transfers to
regions 153.4 220.1 219.4

Deficit (24.9) (22.4) (37.6)

Domestic Financing Increases
----------------------------

7. Budget financing will include Rp 35.8 trillion (USD 3.9
billion) from government investment accounts and bond sales,
and Rp 39.9 trillion (USD 4.3 billion) in foreign loans and
grants. Donors pledged USD 4.3 billion in on-budget loans
and grants to cover Indonesia's financing gap at the June 14

JAKARTA 00009526 003 OF 004

CGI meeting (reftel) in addition to USD 1.5 billion in off-
budget assistance. Smaller financing sources include
divestment of bank shares held by the State Asset Management
Company (PPA). PPA still holds a 26 percent stake in Bank
Permata, and 5.5 percent in Bank Internasional Indonesia
(BII).

--------------------------------------------- ----
Table 4: FY 06 Financing (in trillions of Rupiah)
--------------------------------------------- ----
Items 2005 2006 2006
(Proposed Revision)
--------------------------------------------- -----
Financing 24.9 22.4 37.6
-- Domestic (net) 29.8 50.9 52.4
- Bank financing 4.3 23.0 14.5
- Privatization 3.5 1.0 3.0
- Assets
restructuring 5.1 2.3 2.4
- Govt bonds (net) 22.1 24.9 35.8
- Capital
participation (5.2) (0.4) (3.3)
-- Foreign
loans (net) (4.8) (28.5) (14.8)
- Program loan 11.3 9.9 13.9
- Project loan 24.3 25.2 25.9
- Amortization (40.4) (63.6) (54.7)

----------------------------------
Table 5: FY 2005 Budget and
FY 2006 Budget (Proposed Revision)
----------------------------------
Revenue, Expenditures, and Financing
FY 2005 FY 2006
Items (1) Rp Percent Rp Percent
Trill. GDP Trill. GDP
--------------------------------------------- ------
A. Total revenue 540.2 20.4 651.9 20.9
I. Domestic revenues 532.7 20.1 648.0 20.8
Tax revenues 352.0 13.3 423.5 13.6
Domestic taxes 334.4 12.6 408.8 13.1
Income tax 180.3 6.8 212.3 6.8
1. Oil and gas 37.2 1.4 37.3 1.2
2. Non oil/gas 143.0 5.4 175.0 5.6
Value added tax 102.7 3.9 132.9 4.3
Land/bldg tax 13.4 0.5 18.2 0.6
Duties on land/
building transfer 3.7 0.1 4.4 0.1
Excise tax 32.2 1.2 38.5 1.2
Other taxes 2.2 0.1 2.6 0.1

Int. trade tax 17.6 0.7 14.6 0.5

Non-tax revenues 180.7 6.8 224.5 7.2
Natural resources 144.4 5.4 161.9 5.2
SOE profits 12.0 0.5 21.7 0.7
Other 24.3 0.9 40.9 1.3

II. Grants 7.5 0.3 3.9 0.1

B. Expenditures 565.1 21.3 689.5 22.1
Central govt. exp. 411.7 15.5 470.2 15.1
Personnel 61.2 2.3 79.6 2.5
Material exp. 42.3 1.6 54.6 1.7
Capital exp. 54.7 2.1 67.0 2.1
Interest payments 61.0 2.3 83.5 2.7
Subsidies 119.1 4.5 104.3 3.3
Social assistance 30.0 1.1 37.2 1.2
Other current exp. 43.4 1.6 43.9 1.4

Transfer to regions 153.4 5.8 219.4 7.0

--------------------------------------------- ------
Overall balance (24.9) (0.9) (37.6) (1.2)
--------------------------------------------- ------
Financing 24.9 0.9 37.6 1.2
Domestic financing 29.8 1.1 52.4 1.7
Domestic banks 4.3 0.2 14.5 0.5
Privatization 3.5 0.1 3.0 0.1

JAKARTA 00009526 004 OF 004

Assets restructuring 5.1 0.2 2.4 0.1
Govt debt 22.1 0.8 35.8 1.1
Foreign financing (net) (4.8) (0.2) (14.8) (0.5)
Gross drawing 35.5 1.3 39.9 1.3
Program loan 11.3 0.4 13.9 0.4
Project loan 24.3 0.9 25.9 0.8
Amortization of
foreign debt (net) (40.4) (1.5) (54.7) (1.8)

(1) Column totals may not add perfectly due to rounding.

PASCOE

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