September 27, 2023
JAKARTA – The government will keep a watchful eye on crude oil prices, which are expected to surge by the end of this year. The Finance Ministry says it is prepared to carry out stress testing if needed to anticipate any impact on the state budget, particularly energy subsidies.
Goldman Sachs, Citigroup and others are predicting that the crude oil price will rise to over US$100 per barrel by 2024, following production cuts by Russia and Saudi Arabia, which many fear will cause slowed global growth and prolonged high inflation.
The ministry’s Fiscal Policy Agency (BKF) head of central macroeconomics policy Abdurohman said it has carried out some stress tests in the past to measure such impacts to the state budget and the most recent was completed in early 2022 when crude oil prices rose to around $120 per barrel.
“In January  we did some stress testing to see if the state budget will be impacted significantly by the movement of the oil price,” said Abdurohman on Monday.
However, the ministry has yet to determine the possible impacts of the expected oil surge this year. Abdurohman did not expect this year’s average oil price to touch the $100 mark as projected by many analysts in the United States.
Given that the new budget was only agreed upon last week, he said that the ministry will not take the move until the start of next year, unless oil prices rise considerably.
By then, Finance Minister Sri Mulyani Indrawati will have ordered her team to work out some scenarios to anticipate the gush using policy, Abdurohman asserted.
The Brent crude oil price rose sharply from $86 per barrel on August 31 to $92 a barrel on Tuesday.
Sri Mulyani and the House of Representatives have adjusted their projection of the country’s benchmark Indonesia Crude Price (ICP) to $82 per barrel for next year, as seen in the 2024 state budget law that was passed on Thursday.
The figure was a tad higher than the $80-per-barrel projection set in the proposed draft budget on Aug. 16.
The higher oil price projection has prompted the ministry to raise the budget allocation for energy subsidies and compensation by Rp 13.3 trillion ($859.65 million) for next year, now totaling Rp 339.26 trillion.
Regardless, the initial deficit figure of Rp 522.82 trillion was kept by virtue of increasing the revenue target of Rp 2.8 quadrillion, Rp 21 trillion higher than what the government proposed on Aug. 16.
Separately, state-owned Bank Mandiri chief economist Andry “Asmo” Asmoro said that increasing oil prices may lead to a widening deficit, especially if the increases are followed by flat commodity prices.
“We are a net importer of oil and gas, especially oil. Therefore, the burden for subsidies will swell and that will potentially widen deficit,” said Asmo on Tuesday, explaining what will play out if commodity prices remain indifferent to the oil swell.
He went on to say that, under normal conditions, commodity prices get lifted along with increasing oil prices. Last year, a surge in commodity prices allowed the government to obtain more revenue to weather the impacts of rising subsidy spending.
This, however, is not the case now given that the surge was caused by voluntary supply cuts from global oil producers, namely Saudi Arabia and Russia, he said.
Asmo said the ongoing oil price surge will not translate into a commodity price upswing.