Jokowi Faces Budget Funding Dilemma as He Battles Surge in Virus

(Bloomberg) -- Indonesian President Joko Widodo is trying to tackle a surge in virus cases and the worst economic crisis in more than two decades with dwindling fiscal resources.

He’s due to present a budget Friday that will outline exactly how he intends to do that, with investors watching out for possibly another big burst of spending and the risk that the central bank will have to continue funding rising state debt.

Jokowi, as the president is known, has already taken dramatic steps this year in response to the pandemic-triggered economic crisis. He scrapped a budget deficit ceiling of 3% of gross domestic product, boosted spending to an all-time high and got Bank Indonesia to finance record borrowing.

Now he must convince investors he can keep debt under control and get the economy back on a 5% growth trajectory.

“Next year’s budget could be like walking a tightrope, with the government trying to ensure that fiscal policy remains supportive of growth but at the same time lay out a credible fiscal consolidation roadmap,” said Euben Paracuelles, an economist at Nomura Holdings Plc in Singapore.

Financial markets are giving Jokowi some breathing space for now. Foreign outflows have reversed from earlier this year, bond yields have slid and the rupiah is up more than 10% against the dollar since April.

Here’s what to watch for in the 2021 budget proposal:

Fiscal Deficit

The target for the shortfall will likely be set at 5.2% of GDP for next year compared with an estimated 6.34% this year as the government continues its fiscal stimulus into 2021. However, much of the spending has been held up by bureaucratic red tape, and Jokowi’s administration will need to work harder to get the money flowing through the economy.

“Stimulus and government spending need to become the engine of economic growth to escape the Covid-19 crisis in 2021,” said Shinta Kamdani, deputy chairwoman of the Indonesian Chamber of Commerce and Industry.

Debt Financing

Bank Indonesia has taken unprecedented steps this year to help pay for the budget, agreeing to buy about $27 billion of bonds directly from the government. Officials have said the so-called burden-sharing arrangement is a one-off program, but failure to contain the virus outbreak means the government may have to lean on the central bank again in 2021.

Chatib Basri, a former finance minister, said the central bank can use the same formula next year to help meet the budget shortfall “as long as it’s limited.”

More Stimulus

With many of Indonesia’s almost 60 million micro-, small and medium enterprises and large companies reeling from the pandemic, Jokowi will need to extend fiscal incentives for at least another year.

A waiver of interest payments and a moratorium on principal repayment of debts have provided short-term relief, but businesses will need cheap working capital to get back on their feet. The government could continue to offer tax rebates to select businesses and industries until domestic and external demand rebounds.

“Spending will remain high in 2021 and we will not see any drastic decline in terms of the budget deficit in the next two years,” said David Sumual, chief economist at PT Bank Central Asia.

Health care expenditure will also be key. The government set aside almost $6 billion for the health care sector amid the outbreak, and the allocation may be even bigger next year. The government hasn’t said how it will fund the cost of vaccinating people against Covid-19 when a shot becomes available, but it’s likely to subsidize the cost at least for the poor.

Unemployment Benefits

With the pandemic having rendered some 2 million people jobless -- and more expected if tourism, hotels and other service industries remain shuttered -- Jokowi will need to significantly increase jobless benefits. A pre-work card program that provides cash allowances and online job reskilling is expected to benefit 5.6 million people by October.

©2020 Bloomberg L.P.