VZCZCXRO3648
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #9526/01 2090827
ZNR UUUUU ZZH
R 280827Z JUL 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 7987
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 9933
RUEHBJ/AMEMBASSY BEIJING 3546
RUEHBY/AMEMBASSY CANBERRA 9776
RUEHUL/AMEMBASSY SEOUL 3708
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 04 JAKARTA 009526 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EAP/MTS AND EB/IFD/OMA 
TREASURY FOR IA-SETH SEARLS 
COMMERCE FOR 4430/GOLIKE 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO 
DEPARTMENT PASS EXIM BANK 
 
E.O. 12598: N/A 
TAGS: EFIN EINV ECON PGOV ID
SUBJECT: INDONESIA - 2006 BUDGET REVISIONS 
 
REF: JAKARTA 8006 
 
¶1. Summary.  On July 12 the Minister of Finance presented 
the Parliament Government of Indonesia's (GOI) revisions to 
the 2006 budget.  Significant changes include an increase in 
international oil price assumption to USD 62/barrel from USD 
57, avoiding last year's mistake of clinging to an low oil 
price assumption in a global environment of rising prices. 
The GOI expects revenue-to-GDP of 13.6 percent in 2006. 
Despite double digit inflation in the first half of the 
year, the inflation estimate remained unchanged at 8 
percent.  The interest rate assumption rose to 12 percent, 
from 9.5.  Government spending for 2006 has been slow, with 
only 38 percent disbursed by early July.  The budget deficit 
prediction rose to 1.3 percent of GDP from 0.7 percent. 
Bank financing, government bonds and donor loans and grants 
will cover Indonesia's budget deficit.  End Summary. 
 
¶2. Note: We use the Rp 9,210/USD market exchange rate on 
July 14 throughout this report, which is slightly stronger 
than the GOI's budget assumption exchange rate of Rp 
9,300/USD.  The GOI fiscal year runs on a calendar year 
basis.  End Note. 
 
Revised Forecasts 
------------------ 
 
¶3. On July 12, the Minister of Finance (MOF) presented to 
Parliament's Budget Committee, mid-year revisions to the 
2006 budget.  In anticipation of higher government spending 
to help spur growth, the GOI increased this year's budget 
deficit estimate to 1.3 percent of GDP from 0.7 percent. 
The MOF also revised the oil price assumption upward to USD 
62/barrel from USD 57.  Observers see this as the GOI's 
attempt to avoid last year's mistakes.  In 2005, the GOI 
stood by a low oil price assumption in a rising global fuel 
price environment, leading to concerns about the swelling 
fuel subsidy and fiscal sustainability.  The revisions for 
2006 include a stronger exchange rate of Rp 9,300/USD 
instead of 9,900, and a higher benchmark interest rate of 12 
percent up from 9.5 percent.  Despite double digit inflation 
in the first half of the year, the inflation estimate 
remained unchanged at 8 percent. 
 
----------------------------------- 
Table 1: FY 2006 Budget Assumptions 
----------------------------------- 
Assumptions           2005   2006     2006 
                                (Proposed Revision) 
--------------------------------------------- ------ 
 
Real GDP growth (1)    6.0    6.2     5.9 
CPI inflation          8.6    8.0     8.0 
USD/IDR (avg)          9,800  9,900   9,300 
3-month SBI rate (avg) 8.4    9.5     12.0 
Budget deficit (2)     0.9    0.7     1.2 
Average oil price (3)  54     57      62 
Oil production (4)     1,075  1,050   1,000 
 
(1) In percent 
(2) As percentage of GDP 
(3) In USD per barrel 
(4) In million barrels per day 
 
More Tax Revenues 
----------------- 
 
¶4. Overall, revenue (including foreign grants) is expected 
to reach Rp 651.9 trillion (USD 70.8 billion) in 2006, an 
increase over the Rp 625.2 trillion (USD 67.9 billion) 
previously estimated.  MOF revenue projections consist of 
tax receipts of Rp 423.5 trillion (USD 46 billion), non-tax 
revenue of Rp 224.5 trillion (USD 24.4 billion) and grants 
of Rp 3.9 trillion (USD 423.5 million).  The revised budget 
predicts the revenue-to-GDP ratio will rise to 13.6 percent, 
an increase over last year's 13.3 percent.  The budget also 
assumes declining international trade tax revenues due to 
tariff harmonization and international treaties. 
 
 
JAKARTA 00009526  002 OF 004 
 
 
--------------------------------------------- --- 
Table 2: FY 06 Revenues (in trillions of Rupiah) 
--------------------------------------------- --- 
Items                2005   2006     2006 
                                (Proposed Revision) 
--------------------------------------------- ----- 
Domestic Revenue     532.7  621.6   648.0 
- Oil and gas        175.8  183.7   193.8 
- Non-oil and gas    356.9  437.9   454.2 
Foreign Grants         7.5    3.6     3.9 
Tot. Revenue/Grants  540.2  625.2   651.9 
 
2005 Carry-Over Spending 
------------------------ 
 
¶5. On the expenditure side, the revised budget estimates 
show subsidies of Rp 104.3 trillion (USD 11.3 billion) 
mainly for fuel, and interest payments of Rp 83.5 trillion 
(USD 9 billion), of which interest on domestic debt takes Rp 
58.4 trillion (USD 6.3 billion).  The GOI postponed plans to 
increase electricity tariffs and continues to prop up the 
insolvent, state-owned electricity firm PLN.  On the upside, 
however, Jakarta was able to revise downward interest 
expenditures for foreign debt due to rescheduling.  On June 
28, Finance Minister Sri Mulyani Indrawati announced that a 
fiscal surplus was likely in the first half of the year, 
despite the central government's attempt to stimulate the 
economy by "front loading" 2006 spending, including 
disbursing unspent funds of more than Rp 10 trillion (USD 1 
billion) left over from the 2005 budget. 
 
2006 Spending Slow 
------------------ 
 
¶6. The central government's budget execution in first 
quarter 2006 was better than in 2005 but lower than the GOI 
had planned.  The inability or unwillingness of regional 
governments to spend the funds disbursed to them by the 
central government--in 2006 amounting to fully 32 percent of 
total government expenditures--remains a concern because it 
creates a drag on the economy and undermines the Finance 
Ministry's control over fiscal policy execution.  By July 7 
only 38 percent of annual 2006 budget expenditures had been 
spent.  Analysts blame regional under-spending on the slow 
pace of bureaucratic reform and on President Susilo Bambang 
Yudhoyono's tough fight against graft, which has alarmed 
local officials to the point that they are refraining from 
involvement in project procurement.  A surge in spending is 
now expected in the second half of the year as ministries 
rush to spend their budgets. 
 
--------------------------- 
Table 3: FY 06 Expenditures 
(in trillions of Rupiah) 
--------------------------- 
Items                2005   2006     2006 
                                (Proposed Revision) 
--------------------------------------------- ----- 
Expenditures         565.1  647.7   689.5 
-- Central govt.     411.7  427.6   470.2 
  - Routine          103.5  135.1   134.2 
  - Capital           54.8   62.9    67.0 
  - Interest          61.0   76.6    83.5 
  - Subsidies        119.1   79.5   104.3 
  - Social            30.0   36.9    37.2 
  - Others            43.4   36.5    43.9 
-- Transfers to 
    regions          153.4  220.1   219.4 
 
Deficit              (24.9) (22.4)  (37.6) 
 
Domestic Financing Increases 
---------------------------- 
 
¶7. Budget financing will include Rp 35.8 trillion (USD 3.9 
billion) from government investment accounts and bond sales, 
and Rp 39.9 trillion (USD 4.3 billion) in foreign loans and 
grants.  Donors pledged USD 4.3 billion in on-budget loans 
and grants to cover Indonesia's financing gap at the June 14 
 
JAKARTA 00009526  003 OF 004 
 
 
CGI meeting (reftel) in addition to USD 1.5 billion in off- 
budget assistance.  Smaller financing sources include 
divestment of bank shares held by the State Asset Management 
Company (PPA).  PPA still holds a 26 percent stake in Bank 
Permata, and 5.5 percent in Bank Internasional Indonesia 
(BII). 
 
--------------------------------------------- ---- 
Table 4: FY 06 Financing (in trillions of Rupiah) 
--------------------------------------------- ---- 
Items                2005   2006     2006 
                                (Proposed Revision) 
--------------------------------------------- ----- 
Financing             24.9   22.4    37.6 
-- Domestic (net)     29.8   50.9    52.4 
  - Bank financing     4.3   23.0    14.5 
  - Privatization      3.5    1.0     3.0 
  - Assets 
    restructuring      5.1    2.3     2.4 
  - Govt bonds (net)  22.1   24.9    35.8 
  -    Capital 
    participation    (5.2)  (0.4)   (3.3) 
-- Foreign 
loans (net)           (4.8) (28.5)  (14.8) 
  - Program loan      11.3    9.9    13.9 
  - Project loan      24.3   25.2    25.9 
  - Amortization     (40.4) (63.6)  (54.7) 
 
---------------------------------- 
Table 5: FY 2005 Budget and 
FY 2006 Budget (Proposed Revision) 
---------------------------------- 
Revenue, Expenditures, and Financing 
                           FY 2005       FY 2006 
Items (1)                Rp   Percent  Rp Percent 
                        Trill.  GDP    Trill.  GDP 
--------------------------------------------- ------ 
¶A. Total revenue         540.2  20.4   651.9   20.9 
¶I. Domestic revenues     532.7  20.1   648.0   20.8 
 Tax revenues            352.0  13.3   423.5   13.6 
  Domestic taxes         334.4  12.6   408.8   13.1 
   Income tax            180.3   6.8   212.3    6.8 
   ¶1.   Oil and gas         37.2   1.4    37.3    1.2 
   ¶2.   Non oil/gas        143.0   5.4   175.0    5.6 
   Value added tax       102.7   3.9   132.9    4.3 
   Land/bldg tax          13.4   0.5    18.2    0.6 
   Duties on land/ 
   building transfer       3.7   0.1     4.4    0.1 
   Excise tax             32.2   1.2    38.5    1.2 
   Other taxes             2.2   0.1     2.6    0.1 
 
Int. trade tax            17.6   0.7    14.6    0.5 
 
Non-tax revenues         180.7   6.8   224.5    7.2 
  Natural resources      144.4   5.4   161.9    5.2 
  SOE profits             12.0   0.5    21.7    0.7 
  Other                   24.3   0.9    40.9    1.3 
 
II. Grants                 7.5   0.3     3.9    0.1 
 
¶B. Expenditures          565.1  21.3   689.5   22.1 
 Central govt. exp.      411.7  15.5   470.2   15.1 
  Personnel               61.2   2.3    79.6    2.5 
  Material exp.           42.3   1.6    54.6    1.7 
  Capital exp.            54.7   2.1    67.0    2.1 
  Interest payments       61.0   2.3    83.5    2.7 
  Subsidies              119.1   4.5   104.3    3.3 
  Social assistance       30.0   1.1    37.2    1.2 
  Other current exp.      43.4   1.6    43.9    1.4 
 
 Transfer to regions     153.4   5.8   219.4    7.0 
 
--------------------------------------------- ------ 
Overall balance          (24.9) (0.9)  (37.6)  (1.2) 
--------------------------------------------- ------ 
Financing                 24.9   0.9    37.6    1.2 
 Domestic financing       29.8   1.1    52.4    1.7 
  Domestic banks           4.3   0.2    14.5    0.5 
  Privatization            3.5   0.1     3.0    0.1 
 
JAKARTA 00009526  004 OF 004 
 
 
  Assets restructuring     5.1   0.2     2.4    0.1 
  Govt debt               22.1   0.8    35.8    1.1 
 Foreign financing (net)  (4.8) (0.2)  (14.8)  (0.5) 
  Gross drawing           35.5   1.3    39.9    1.3 
   Program loan           11.3   0.4    13.9    0.4 
   Project loan           24.3   0.9    25.9    0.8 
  Amortization of 
  foreign debt (net)     (40.4) (1.5)  (54.7)  (1.8) 
 
(1) Column totals may not add perfectly due to rounding. 
 
PASCOE