2019 economy remains weak: Trade Balance / State Budget downtrend persists

Anthony Budiawan
Managing Director of the Political Economy and Policy Studies (PEPS)

IO – Indonesia’s economy remains under pressure as of the first se­mester of 2019. Export and import downtrends endure as our trade balance deficit swells. Exports in Semester I of 2018 stood at USD 87.86 billion, slipping 8.57% to USD 80.32 billion in Semester I of 2019. Imports in Semester I of 2019 at USD 82.26 billion also dropped at a lower rate than ex­ports (7.63%) from the rate in Semester I of 2018 at USD 89.05 billion.

This means that the nation’s trade balance deficit in Semester I of 2019 rose USD 1.93 billion or 61.7%, compared to the same pe­riod in 2018, where the trade bal­ance deficit was USD 1.2 billion. This is unnerving, as our trade bal­ance deficit in 2018 was the worst deficit rate throughout Indonesian history. Will total deficit in 2019 ex­ceed that of 2018?

Indonesia’s trade balance is di­vided into two major groups: petro­leum & natural gas trade balance and non-petroleum & natural gas trade balance. Our petroleum and natural gas trade balance is always in deficit, as Indonesia is a net pe­troleum and natural gas importer. The amount of our deficit depends on the rise and fall of global oil pric­es.

We should be grateful that global oil prices for the first 6 months of 2019 were significantly depressed, in comparison with prices over the same period in 2018, by an average of 7%. Therefore, our petroleum and natural gas trade balance deficit also dropped, from USD 5.62 billion in Semester I of 2018 to USD 4.78 billion in Semester I of 2019. Howev­er, such a petroleum & natural gas trade balance deficit decrease is ren­dered meaningless by our terrible non-petroleum & natural gas trade balance performance: a non-petro­leum & natural gas trade balance surplus dropped sharply from USD 4.42 billion in Semester I of 2018 to USD 2.85 billion in Semester I of 2019.

This is a grave concern, because non-petroleum & natural gas trade is Indonesia’s primary source of foreign currency. If our non-petro­leum & natural gas trade balance is down, we can be sure that our trade balance deficit will increase, our current transaction deficit will increase as well, and there will be more pressure on the Rupiah ex­change rate. We can only hope that non-petroleum and natural gas trade balance surplus can climb back up in Semester II of 2019, and that global crude oil prices do not increase, so that we can control our petroleum & natural gas trade bal­ance deficit.

Furthermore, our State Budget performance was simply pathetic. Tax income for the first 6 months of 2019 was only 38.57% of the 2019 target. Another nasty surprise is that VAT and Luxury Goods Tax income is only 30.4% of this year’s target. VAT and Luxury Goods Tax incomes have decreased 2.66% from that of the same period last year. This shows that economic activity has fallen below the target and our consumption has weak­ened. Consequently, tax income to GDP ratio will probably crash again, and may become even low­er than 9%. This low rate is a real cause for concern.

On the other hand, the loan in­terest that the Government must pay continues to rise, and this bur­dens the State Budget. The ratio of loan interest to tax income in se­mester I of 2019 is already 19.56%. In other words, for every Rupiah of tax collected by the Government, 19.56% must be paid to the loan capitalists. To make things worse, about 60% of this amount that must be repaid is held by foreign creditors.

With continued restrictions of State finances, it will be even hard­er to eradicate poverty. It is no won­der that the rate of reduction of In­donesia’s poor in the past few years is negligible: the poor comprise 9.41% of our population in May 2019, decreasing a mere 0.25% from the proportion in September 2018, and only 0.41% of the poor population in March 2018.

This State Budget condition will negatively impact Indonesia’s eco­nomic growth, because it contin­uously restricts the Government’s ability to stimulate our economy. In fact, the Government must reduce their expenditures as the State Bud­get deficit and State’s debts contin­ue to increase. This condition might push the Government to resort to “berserk” strategies to balance the State Budget, such as greatly in­creasing levies, customs, and taxes in order to fill up the State’s emp­ty coffers. This easy money would end up further eroding the people’s buying power and the economy as a whole.