Indonesia on right track as oil prices fall
Furthermore, falling inflation will also help to reset the local bond yield curve. Fiscal Turnaround With global oil prices at current depressed levels and with the government ending its gasoline subsidy and sharply reducing diesel fuel subsidy domestically, Indonesia is expected to save some US$18 billion— or 2.3% of gross domestic product Lower oil prices are helping Indonesia cut its fiscal shortfall, reducing the need for government bond issuance, and narrow its trade deficit. Moreover, they are helping to contain inflation. All of these effects are contributing to brightening the outlook for the local bond market. (GDP)—in its annual budget.
This means that a projected fiscal shortfall of 2.4% of GDP in 2015 will effectively be erased. If none of the savings are spent on new initiatives, such as those in infrastructure and social welfare, the government’s funding needs—thus bond supply—will be greatly reduced, supporting local-currency bond performance. Even if 60% of the windfall is to be spent, as long as that goes to productive projects—as officially promised—a resultant boost to future productivity and growth would bring about structural improvements.
At any rate, what matters the most is that Indonesia’s fiscal shortfall will not blow up, as some had worried previously, and should be contained at less than 1% of GDP this year. This makes Indonesia stand out among the “fragile” emerging economies. Worst of Trade Deficit Is Over The worst of Indonesia’s trade deficit is behind us, thanks to the positive terms-of- trade effect and the still-depressed domestic demand. Outside oil and gas, Indonesia is running a persistent monthly trade surplus of some US$1 billion, while the oil and gas deficit has already shrunk to US$1 billion in December 2014 from US$1.4 billion in November owing to the oil price decline. We believe that the full impact of falling oil prices has yet to be seen and that the oil trade deficit will easily be halved as prices stay low.
To read the rest of the article, please click here
Frequently Asked Questions about this Article…
Falling oil prices are benefiting Indonesia's economy by allowing the government to reduce domestic fuel subsidies, which in turn helps cut the fiscal shortfall and narrow the trade deficit. This also contributes to a brighter outlook for the local bond market.
Reduced fuel subsidies are expected to save Indonesia around US$18 billion, effectively erasing a projected fiscal shortfall of 2.4% of GDP in 2015. This reduction in subsidies helps improve the country's fiscal balance and reduces the need for government bond issuance.
Indonesia's bond market outlook is improving due to the government's fiscal turnaround, supported by lower oil prices and reduced fuel subsidies. These factors help contain inflation and reduce the fiscal shortfall, which supports local-currency bond performance.
If Indonesia spends 60% of its fiscal savings on productive projects in infrastructure and social welfare, it could boost future productivity and growth, leading to structural improvements in the economy.
Indonesia's trade deficit has improved due to falling oil prices. The oil and gas deficit shrank from US$1.4 billion in November to US$1 billion in December 2014, and the overall trade deficit is expected to continue decreasing as oil prices remain low.
Indonesia stands out among emerging economies due to its effective management of the fiscal shortfall, which is expected to be contained at less than 1% of GDP. This is a significant improvement compared to previous concerns about the fiscal deficit.
The reduction in Indonesia's fiscal shortfall decreases the government's funding needs, which in turn reduces the supply of government bonds. This supports the performance of local-currency bonds.
Outside of oil and gas, Indonesia is running a persistent monthly trade surplus of approximately US$1 billion, indicating a positive trade balance in non-oil sectors.
Call 1300 880 160
Start a chat
Schedule a call
