(June 18): Fiscal and currency risks have likely passed in Indonesia, according to a Citigroup Inc analyst who was once lambasted by the country’s finance chief for his forecasts.
Jakarta-based economist Helmi Arman said in a note on Wednesday that he now sees that the government of President Prabowo Subianto keeping its budget deficit within legal limits.
Budget deficits this year and next should come in below the closely-watched cap of 3% of gross domestic product — a reversal of Arman’s earlier outlook for a breach, that caught the attention of Finance Minister Purbaya Yudhi Sadewa.
That’s due to the government slashing spending for its US$15 billion ($19.3 billion) free-meal programme amid a corruption probe, and improving tax collections. The decline in oil prices will also reduce pressure on the government’s fuel subsidies.
The outspoken Purbaya in February had chastised Arman — one of the more critical economists in Jakarta — for his views, saying he wasn’t qualified to make the forecast as he didn’t hold a PhD.
According to Citi on Wednesday, Indonesia’s balance-of-payments risks have also subsided. The central bank’s move to halt bond-buying has begun to lure foreign inflows, while dividend repatriation has peaked, Arman said.
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Citi expects Bank Indonesia to hold its key rate at its meeting later on Thursday. Majority of economists in a Bloomberg survey have penciled in a 25-basis-point hike.
Still, Arman cautioned that policy uncertainties continue to hang over Indonesia, which could yet test long-term foreign investors to return.
Absent major spending cuts, the government may choose to move various expenditures below the line, meaning its monthly budget reports may not reflect actual fiscal conditions. “Budget transparency may come under increased scrutiny by investors,” Arman said.
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“Another source of uncertainty is the recent changes to laws governing central bank’s performance evaluation, which have not yet been scrutinised publicly and which may or may not impact Bank Indonesia’s operational independence,” he added.
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