Indonesia | Delayed fiscal consolidation unlikely to raise debt risks

Due to ongoing pandemic-related spending needs, we now expect Indonesia’s fiscal deficit will narrow to 3% of GDP only by 2024, a year later than we anticipated last year. Our latest forecast assumes a slight fiscal expansion in 2021 and a gradual reduction in deficits from 2022 onwards.
What you will learn:

• Deficit reduction will rely heavily on expenditure
  consolidation. While the government’s new tax measures will help boost revenues to some degree, lack of compliance and distortionary exemptions are chronic problems in Indonesia’s tax system. Therefore, we forecast only a moderate rise in tax revenues-to-GDP ratio in the medium-term.
• The government will likely have to re-visit its three-year timeline of reinstating the 3% fiscal deficit ceiling rule by 2023. But we estimate government debt will remain below its 60% of GDP threshold if the authorities stick to fiscal consolidation even with some delays in meeting the deficit target.
• We expect the central bank will continue to help fund fiscal deficits through 2022, in line with the government’s plan. While we forecast Indonesia’s longterm bond yields will rise in line with global rates, debt dynamics will become more favorable with the interest rate-growth differential turning negative from 2022 onwards.