Country Report Indonesia February 2011

Outlook for 2011-15: Fiscal policy

We expect the fiscal deficit to widen to the equivalent of 1.3% of GDP in 2011, from an estimated 0.8% in 2010. This compares with the target of 1.8% of GDP in the budget for this year, which was approved by the DPR in October. Although the current finance minister, Agus Martowardojo, is continuing with the carrot-and-stick system introduced by Ms Mulyani of increasing the budgets of government ministries that meet their spending targets and reducing allocations to those that miss them, underspending remains a problem. Final results for 2010 have yet to be published but, speaking in early January, Mr Yudhoyono said that the deficit in that year was equivalent to only 0.6% of GDP. The inability of ministries to spend all the funds allocated to them will continue to restrict expenditure, and we therefore expect the deficit to shrink during the remainder of the forecast period, to stand at 0.3% of GDP in 2015. The ratio of public debt to GDP is forecast to drop further in the next few years, and this could result in Indonesia's sovereign debt rating rising to investment grade. This would make it cheaper for the government to raise funds in international markets.

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