Indonesia: Government approves 2024 budget draft - the details

• Deficit projected at 2.29% of GDP, same as in 2023
• Revenues to rise by 5.6%, supported by tax revenues
• Expenditure to rise by 5.8%, mainly on account of interest expenses and subsidies
• We do not expect to see budget slippage due to the upcoming presidential and general elections
• We see the 2024 draft budget as realistic

The government approved the 2024 budget draft, according to a press release on the finance ministry's website. The fiscal deficit is projected at 2.29% of GDP, almost the same as in 2023, when it is expected to touch 2.30% of GDP, beating the 2.84% target. Revenues are set to rise by 5.5% compared to the actual projections for the 2023 budget execution, while state expenditure will go up by 5.8%.

Macroeconomic framework

GDP growth is expected to gain pace to 5.2% in 2024, up from 5.1% this year, though largely in line with the 5% long-term average potential growth rate for the Indonesian economy. As a result, the economy will remain on a steady expansionary path for the third year in a row. CPI inflation is projected to lose further pace to 2.8% in 2024, below the midpoint of the central bank's 3+/-1% target. In our view, this could provide some space for monetary easing, which would in turn support the slight acceleration of GDP growth.

The 10-year government bond yield is also expected to drop to 6.7%, though it will remain elevated compared to the pre-COVID level in 2019 and the levels during the monetary expansion in 2020-2021. The rupiah's exchange rate is expected to stabilise at USD/IDR 15,000, though there certainly will be some downward pressure as the Fed keeps hiking the Fed Funds rate, while Bank Indonesia has paused monetary tightening and may start to normalise the monetary policy.

The Indonesian crude oil price is projected to pick up slightly to USD 80 per barrel, which would support budget revenues. Crude oil lifting is also set to increase, but the government has traditionally set goals for higher lifting, while it has been going down every year due to the lack of investment and the amortisation of existing equipment. Gas lifting is also projected to increase, which is a more realistic target, in our view.

Finally, the unemployment rate is expected to drop further to 5.0-5.7%, returning to the pre-COVID levels. This seems a likely projection, given that the economy keeps growing at the current pace.

State revenues

State revenues are projected to rise by 5.6% in 2024, building upon similar growth observed in 2023. The increase will again come mainly on the back of higher tax revenues, driven up by both direct and indirect taxes. This is not surprising, given that private consumption is the main GDP growth driver, hence indirect tax revenues should keep growing, while the growing employment should also boost direct tax collection. Corporate tax proceeds are also set to increase, in line with the growing profitability.

On the other hand, non-tax revenues are set to decline, mirroring the trend from this year. This suggests that the government expects commodity prices to keep declining, while the additional bans on bauxite, tin and copper exports will further weigh on the export duties the government collects. On the other hand, the slight oil price appreciation should help boost export duties from oil and gas.

Expenditure

On the expenditure front, state spending will rise by 5.8% in 2024, reflecting higher central government spending and also a slight increase in transfers to regions and the village fund. Notably, the government intends to consolidate ministerial expenditures, which will drop slightly, despite the promised 8% civil servants' wage hike and the 12% pension hike.

On the other hand, non-ministerial expenditure will increase at a double-digit pace, largely reflecting higher interest payments on government debt (up by 12.7%) and higher subsidies (up 4.2%). We should note that the government has been rather conservative about interest expenses and has projected more than the actual expenses over the last five years. Regarding the rising subsidies, this is mostly related to non-energy subsidies, including support to households and MSMEs through the various state programmes.

Transfers to regional governments and village funds are set to keep growing, up by 3.9%, in an effort to support regional initiatives, including some infrastructure projects. In fact, transfers from the general allocation fund and the special allocation fund are set to increase, while the transfers from the profit-sharing fund will drop (as the government probably expects lower profitability of the state-owned enterprises).

Conclusion

As a result, the state budget deficit is set to rise by 7.5% y/y to IDR 522.8tn in 2024, though the deficit-to-GDP ratio will remain almost the same at 2.3% of GDP. We will see a more notable improvement in the primary deficit, which will nearly halve to IDR 25.5tn. Given that the government has outperformed its original budgets over the past couple of years, we could expect to see a small primary surplus as well, in our view.

All in all, we think the 2024 budget bill is realistic, with the government more or less counting on the same revenue growth as in 2023. On the other hand, the government has proved that it is prudent on the expenditure side, though its position has been supported by better-than-expected revenues over the past couple of years.

Moreover, we expect to see little impact from the upcoming presidential and general elections in Feb 2024, given that the current President Joko Widodo concludes his second term in office and he is not eligible to run again. The favourable economic conditions will bode well for all pro-government parties, which is all but two (and possibly NasDem as well), hence we do not expect to see a flurry of pre-election spending late in 2023.