26/05/2011 (Jakarta Post) - We attended a Finance Minister’s analysts meeting last week. Note that it has been a year since Agus Martowardojo replaced Sri Mulyani as Indonesia’s finance minister, and Friday was the first time he decided to provide an analysts gathering.

The leading points related to recent state budget policies were as follows:

Government spending realization in the first month of this year (4M11) reached 22.7 percent from the 2011 target of Rp 1,229 trillion (US$142.6 billion), slightly up compared from the level in the first month in 2010 of 20 percent. Note that the government’s capital expenditures realization only reached 6.3 percent, whereas the fuel subsidy realization was 30.4 percent on the back of higher non-subsidized fuel prices causing increased subsidized fuel consumption. On the flip side, the 4M11 government revenue realization reached 30 percent from the 2011 target of Rp 1,104 trillion, raising the 4M11 budget surplus to Rp 52.5 trillion.

In regard to slower government capital expenditure realizations, the finance minister said the government already arranged the system to fasten the capital expenditure distribution process, but the program’s execution on other government institutions was still weak.

The government was still vigilant on the global oil price movement, which has led the Indonesian Crude Oil Price (ICP) to US$117 a barrel through May 10, 2011 ($107 per barrel on average year-to-date), 33.7 percent above the government’s current assumption at $80 per barrel. This also has driven the non-subsidized fuel prices up and has made subsidized fuel consumption exceed the 4M11 government quota. On the flip side, other risk comes from domestic oil lifting realizations, which are still below the government’s current target of 970,000 barrels per day.

As was already discussed by Bambang Brodjonegoro, head of the ministry’s fiscal policy office and our speaker at the last Bahana Investor Forum, in responding to the current situation, the government plans to maintain subsidized fuel prices instead of proposing fiscal adjustments due to the steady appreciation of the rupiah, which has undoubtedly lightened the state budget burden. Additionally, if we use BKF’s sensitivity analysis and apply the most recent rupiah exchange rate of Rp 8,550 per $1 and oil price of $99 per barrel, the effect on the state budget would be a deficit of only Rp 3.3 trillion. This is very small in our view, suggesting that the government may continue to maintain the current fuel subsidy policy. At this point, we believe this would calm inflationary pressure and halt the central bank’s tightening monetary moves.

On the flip side, we also noted the salient points related to the industrial issues as follows:

On the land acquisition bill, which is currently being deliberated at the House of Representatives, the signing could take longer than we had originally expected, which was July as per our meeting with state toll road operator Jasa Marga. This protracted process is due to issues of “justice”. The land acquisition bill is now slotted for signing in August, although it could be further delayed to November. If not passed in November, it will have to wait until February 2012 as the House would be in recess at the end of the year.

On the crude palm oil (CPO) export tax, there are plans to widen the band on the current CPO tariff plan. While this could benefit Indonesian planters, we believe the impact could be minimal as the government continues to believe that the CPO export tax should still serve to assure sufficient domestic CPO supplies. Additionally, the government believes that the CPO export tax will help to curb inflationary pressures.