PUBLIC spending is unlikely to reverse an economic downturn in Indonesia, although it ought to cushion the blow, according to a new report by Citi economist Helmi Arman.
While economic weakness is expected to persist into 2020, political leaders will probably cut spending only selectively, “and may even push to boost spending”, he wrote, although this could yet depend on who is named the next Finance Minister.
Still, the loosened purse-strings may be limited to social welfare spending, such as cash and energy subsidies, rather than major construction-related infrastructure stimulus projects, which Mr Helmi said “is given institutional capacity constraints in the broader government”.
Citi has warned that Indonesia risks fall short of its target deficit of 1.76 per cent of gross domestic product (GDP) for 2020, as lower commodity prices eat into revenues.
“Fiscal impulse in Indonesia is potentially stronger during periods of high commodity prices, as spending can be boosted through resource revenues instead of borrowings that push up future interest payments,” Mr Helmi acknowledged.
He also noted that, if stimulus deals involve subsidies, then inflation in 2020 may come in lower than the house’s forecast of roughly 4 per cent.