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Indonesia Deficit Discipline Supports Spending, Analyst Says
Michael Dwyer | November 18, 2009

Indonesia can afford to ramp up spending on development, says a Morgan Stanley analyst. (Photo: Antara) Indonesia can afford to ramp up spending on development, says a Morgan Stanley analyst. (Photo: Antara)
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The government’s “virtuous” efforts to trim its budget deficit have given the government room to significantly increase spending to stoke economic growth, according to Morgan Stanley.

“Indonesia should leverage its public finances to ramp up development spending as the economy suffers from infrastructure bottlenecks,” Deyi Tan, an economist at Morgan Stanley in Singapore, said in a report on Wednesday. “We calculate that the government has room to raise expenditure by around 3 percent of gross domestic product.”

President Susilo Bambang Yudhoyono, re-elected in July to a second five-year term, expects the budget deficit to narrow to 1.6 percent of GDP in 2010 from about 2.5 percent this year.

Finance Minister Sri Mulyani Indrawati said this month that the 2009 shortfall may be smaller than expected as faster growth has cut the need for stimulus.

The economy expanded 4.2 percent in the third quarter from a year earlier after gaining 4 percent in the previous three months. Indonesia has fared better than its neighbors during the global recession as it relies less on exports.

Yudhoyono’s government could afford to boost spending to 3 percent of GDP while retaining a public debt-to-GDP ratio of 35 percent, according to Morgan Stanley. That compares with 38.1 percent in Thailand and 41.6 percent in Malaysia, Tan said.

“With Indonesia’s public debt standing below the globally acceptable range of 45 percent to 60 percent, we think that the room for expenditure expansion is likely bigger,” she said.

Yudhoyono told the Asia-Pacific Economic Cooperation forum in Singapore last week that the government would streamline investment procedures, aiming to lift annual economic growth to 6.3 percent to 6.8 percent over the next five years.

Investors are flocking to Indonesia, driving the Jakarta Composite Index up more than 80 percent this year. The rupiah has risen 17 percent.

The state’s ability to cut the budget deficit may improve its credit rating, according to Morgan Stanley.



Bloomberg