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Controlled Fiscal Deterioration

16 June 2020 by jbchevrel

Indonesia CDS has traded along with risk, now 123, it was 60 pre-COVID (2/21) and peaked 277 (3/23). It was 1.5x China CDS pre COVID, peaked at 5x and now 2.5x. post COVID tight 2.3x. Fiscal is deteriorating in a controlled way, looking at Q2 data. The large fiscal deficit in May was driven by revenue dropping -42% YOY. Expenditures held up and fell by just -1.9% YOY, partly reflecting higher social assistance spending, even though the implementation of fiscal support measures against COVID started slow. The consensus is for FY 2020 fiscal deficit at 7.5% of GDP, above the government’s official projection of 6.3%. The May fiscal data supports the view that the full-year tax revenue shortfall will be larger than budgeted, while spending will likely have to rise further to accommodate more urgent support measures amid still rising reported new daily COVID cases. The MOF on June 4 decided to reduce the total size of the economic recovery program as part of the fiscal support package, taking out compensation payments to SOEs which was originally set at IDR 90T. Some offset came from increases in measures to support consumption and additional spending on sectors such as Tourism and Housing. As a result, the total size of the program fell slightly to IDR 590T (ie 3.8% GDP) versus the IDR 641T (4.2% GDP) previously announced by the MOF. Noteworthy that the compensation to SOEs will still be paid, but in later budgets, as required by Indonesian law. Indonesia would of course benefit from more easing from China’s side, its top export destination, in the months to come.