Fiscal Flexibility May Be Good for Indonesia, Fitch Says

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(Bloomberg) --

Amending a legally imposed cap on Indonesia’s budget deficit may boost the government’s ability to deploy counter-cyclical measures to support the economy, according to Fitch Ratings Inc.

Indonesia’s cabinet is discussing the possibility of relaxing the budget deficit ceiling of 3% of gross domestic product, a move that would allow the government to spend and borrow more to stimulate growth in Southeast Asia’s biggest economy. ​

​While no decision has been taken yet, easing the rule won’t necessarily harm the nation’s credit rating, according to Fitch.

“Adding some flexibility to Indonesia’s fiscal rule could enable annual budgets to play a greater counter-cyclical role in economic management,” said Stephen Schwartz, Fitch’s head of Asia-Pacific Sovereigns. It would be “consistent with our ‘BBB’ rating as long as it does not result in a material increase in the public debt burden,” he said.

Indonesia’s public debt is less than 30% of GDP, below the median for similarly rated peers, but the country’s revenue ratio is “very low” and acts as a constraint on the rating, Schwartz said.​

Read: Indonesia’s Cabinet Is Discussing Relaxing Fiscal Deficit Cap

This year’s growth slowdown and reduced tax collection have already pushed the government to widen its deficit target to 2.2% of GDP from an initial projection of 1.84%. Officials have said they are prepared to widen the fiscal gap next year too.​

Mohamed Faiz Nagutha, an economist with Bank of America in Singapore, said the annual 3% fiscal cap “makes no allowance for economic cycles which typically last longer than a few quarters.” Changing the rule so that the deficit averages 3% over five years, an option being discussed by the cabinet, “will allow for larger deficits during downturns which can be offset by surpluses during booms,” he said.

©2019 Bloomberg L.P.

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