WASHINGTON (Reuters) - Indonesia will not need to repeat last year’s major spending cut as the government’s revenue projections look “on track” amid strengthening growth, Finance Minister Sri Mulyani Indrawati told Reuters.
Indrawati said in an interview on Monday that the government would reallocate some spending within the budget to more “productive” areas that can support growth, such as land acquisition for infrastructure projects.
The former World Bank managing director also insisted that Indonesia’s international banking environment was not becoming more difficult, despite a recent row over a negative JP Morgan research report.
One of Indrawati’s first acts when she returned to Jakarta as finance minister in July 2016 was to slash state spending by $10.2 billion to hold Indonesia’s deficit within a 3 percent legal limit.
“We are not going to cut. The president is asking to reallocate more, focusing on the spending which is productive,” Indrawati said of this year’s budget, after the International Monetary Fund and World Bank spring meetings in Washington.
She said revenue projections appear “on track” as the World Bank projects Indonesia’s economic growth at 5.2 percent this year, compared to the government’s official 5.1 percent forecast used for budget planning, and 5.0 percent last year.
“If there is going to be a change in the revenue it will be because of the commodity prices, like oil. We are assuming $45 a barrel, maybe it’s going to be an average of $50,” she said.
Indonesian crude grade prices <OSP/ID> ranged from $46.65 a barrel to $50.80 a barrel on Monday. Benchmark U.S. light crude CLc1 traded at $49.49.
Indrawati said the government needed to boost infrastructure spending this year for some specific projects, such as hosting the Asian Games in 2018, but added, “The overall top line is not going to change.”
Interest rates are another variable that could have an effect on revenues, depending on how far and fast the U.S. Federal Reserve raises rates this year, which could affect growth, capital flows and the value of the rupiah.
Indrawati said Indonesia was much better positioned to handle Fed rate hikes than during the “taper tantrum” of 2013, when funds flowed out of emerging markets as the Fed signaled it would scale back its bond-buying efforts.
Indrawati said this time around, the Fed’s intentions have been well-telegraphed, and confidence in Indonesia’s growth prospects, its growing middle class and its reform efforts are also stronger.
“As long as this movement of the interest rates is being viewed by the market as a sign of strength of the U.S. economy, I think there will be less possibility of volatility,” she said.
Following the growth of religious tension in the recent election of the governor of Jakarta, Indrawati said it was “not necessarily the correct projection” to assume similar issues for 2019 national elections, and added that it would have no effect on President Joko Widodo’s reform program.
“This is still a healthy democracy, it’s a good result of democracy. People presenting what they wish, what they expect,” she said. “And for government, at the national level, we will continue doing our program.”
Indrawati sent shockwaves through the banking sector in January when she severed the government’s business ties with JP Morgan Chase and Co (JPM.N) after the bank analysts downgraded Indonesian stocks to “underweight” in the wake of U.S. President Donald Trump’s election in November.
She said she wanted to encourage banks to operate in a “healthy way” for the country and independent research was welcomed as long as it was accurate. Banks working on behalf of the government, such as those handling sovereign bond issues, need to be clear on what the government expects from them, she said.
“What we discussed with JP Morgan was that the relationship between the government of Indonesia with any institution, if it is really based on mutual benefit and serving the country, it should be defined more clearly,” Indrawati said.
The removal of JP Morgan as a primary bond dealer was followed by new regulations requiring Indonesia’s primary bond dealers to “safeguard” their partnership with the government and avoid conflicts of interest..
Reporting by David Lawder; Editing by Clarence Fernandez