Oil Price Shock Could Force Indonesia To Breach Three Per Cent GDP Deficit Rule

JAKARTA, March 13 (Bernama) -- Indonesia may struggle to keep its budget deficit within the legal ceiling of three per cent of gross domestic product (GDP) if global oil prices continue to surge due to prolonged geopolitical tensions, potentially forcing the government to consider extraordinary fiscal measures.

Coordinating Economic Minister Airlangga Hartarto, during a plenary cabinet meeting, presented simulations to President Prabowo Subianto showing that under several oil price scenarios linked to a conflict lasting between five and 10 months, Indonesia’s fiscal deficit could exceed the statutory threshold.

“So this means that under these various scenarios, maintaining the three per cent deficit will be difficult unless we cut spending and cut growth, Mr. President,” he said during the meeting broadcast live on YouTube on Friday.

Airlangga said government projections show that if geopolitical tensions persist for about five months, with the Indonesian crude price averaging US$86 per barrel and the rupiah weakening to 17,000 per US dollar, the fiscal deficit could reach 3.18 per cent of GDP.

In a moderate scenario where the conflict lasts around six months, oil prices could average US$97 per barrel, and the rupiah could depreciate to 17,300, widening the deficit to 3.53 per cent of GDP.

In the worst-case scenario, he noted that if the conflict extends to about 10 months, oil prices could rise to US$115 per barrel and the rupiah would weaken further to 17,500 per US dollar, pushing the deficit to 4.06 per cent of GDP.

He said the projections assume economic growth of between 5.2 and 5.3 per cent, while yields on government securities could rise to 6.8-7.2 per cent, reflecting tighter financial conditions, noting that Indonesia’s state budget currently assumes an exchange rate of 16,500 rupiah per US dollar.

Despite the risks, Airlangga said Indonesia’s recent crude purchases remain below the state budget assumption of US$70 per barrel, with realised prices at US$64.41 in January and US$68.79 in February.

Airlangga said the government might consider emergency fiscal measures similar to those adopted during the COVID-19 pandemic, including issuing a government regulation instead of a law to provide greater fiscal flexibility. He said such a regulation could allow the government to temporarily exceed the deficit limit and provide greater flexibility in fiscal management.

He added that part of the fiscal pressure could also be offset by higher revenues from commodities whose prices typically rise alongside global energy prices. “Usually, CPO prices rise together with fuel prices. Nickel usually rises, gold and copper also rise,” he said.

-- BERNAMA