(Bloomberg) -- Indonesia will make good on its pledge to return the budget deficit below a mandated 3% of gross domestic product next year as pressures from the pandemic ease. 

Southeast Asia’s largest economy will reduce its 2023 borrowing plans by 8% to 696.3 trillion rupiah ($47.2 billion), its lowest since 2019, amid cuts to its health care and social protection budgets, according to the annual budget presented by President Joko Widodo in parliament on Tuesday. 

Returning the budget shortfall below the ceiling will mark the end of three-years of debt-fueled spending to see Indonesia through Covid-19 disruptions. Supported by monetary policy that’s remained accommodative despite tightening by peers around the world, the Indonesian economy is seen expanding at a pace last seen before the pandemic.

GDP growth this year is seen in a range of 5.1%-5.4%, with expectations of the performance to be sustained next year at 5.3%, Jokowi said. “Growth will be driven by a recovery in domestic demand and improvement in export performance,” he said. 

Indonesia’s benchmark stock index rose 0.57% on Tuesday, while the rupiah narrowed its losses to 0.17%. Benchmark 10-year yields eased by 5 basis points, as bonds rose after the budget measures were unveiled.

Subsidies and compensation payments to bring down energy costs -- which have been crucial to taming inflation -- will fall by a third to 336.7 trillion rupiah next year from a record-high 502.4 trillion rupiah in 2022.

With its commodity earnings set to wane, the government said it would also have to “optimize” revenues through reforms to expand its tax base, increase compliance, and focus incentives on strategic sectors.

That should shrink Indonesia’s fiscal shortfall to 2.85% of GDP in 2023, as forecast by Fitch Ratings which had affirmed the country’s investment grade credit score in June.

“Fiscal consolidation is of utmost importance. The health of the state budget must be improved in order to be adaptive and responsive in the medium and long term,” Jokowi said.

Inflation Expectation

While Indonesia’s inflation hasn’t soared as much as neighbors like Thailand and the Philippines, headline consumer price gains have breached the central bank’s target and were at a seven-year high in July. Even the core inflation measure tracked by Bank Indonesia is closer to the mid-point of its 2%-4% goal.

Jokowi sees inflation also returning within target at 3.3% next year, and the currency averaging 14,750 against the dollar, while citing the war in Ukraine as a key risk to the economic outlook.

Other highlights from the 2023 annual budget:

  • State revenues at 2,443.6 trillion rupiah, roughly flat from 2,436.9 trillion rupiah outlook this year
    • Tax revenues at 2,016.9 trillion rupiah
  • State expenditures at 3,041.7 trillion rupiah, down 4% y/y from 3,169.1 trillion rupiah
    • Subsidies at 297.2 trillion rupiah, up 4.4% from 284.6 trillion rupiah
  • Budget deficit at 598.2 trillion rupiah, down 18.3% y/y from 732.2 trillion rupiah
  • Debt financing at 696.3 trillion rupiah, down 8.1% y/y from 757.6 trillion rupiah


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