Macro Strategy

2025 Proposed Budget: The Groundwork for Transition

 

  • The 2025 budget facilitates a smooth transition, allowing the immediate inclusion of the new government's key initiatives.
  • High tax growth remains the primary revenue source as non-tax revenue declines, with a focus on expanding the tax base.
  • The conservative macro assumptions include a 2.5% deficit projection (vs FY24’s 2.7%), despite a high 7.1% yield assumption in FY25.

 

The fiscal design for transition. The 2025 proposed budget lays the groundwork for smooth transition, allowing for the immediate integration of the new government’s essential initiatives and agendas. In our opinion, the budget is designed to support the incoming administration while ensuring the continuity of key projects. This includes incorporating the next government's Free Nutritious Food Program and continuing the development of the New Capital City, a major legacy project of the current administration. The key macro assumptions seem conservative, particularly with the fiscal deficit projected at 2.5%, lower than FY24 outlook of 2.7%. This is notable given the relatively high yield assumption of 7.1% (compared to the current yield of 6.7%), which would typically suggest a larger deficit.

 

The Five Key Focus Area. The 2025 proposed budget highlights five key focus areas that are primary to the government's fiscal strategy:

  1. The government is targeting a substantial 13.9% increase in tax revenue for FY25, compared to the modest 2.8% growth projected for FY24, to compensate for the expected decline in non-tax revenue. To optimized tax revenue the government, among others, will expand the tax base through both intensification and extensification, with income tax and VAT are expected to grow by 14-15% inFY25. The contribution from those two items to total tax revenue will rise to 86.5%, up 1.7ppt from last year’. The government has indicated higher 12% VAT will be implemented in 2025.
  2. While the combined growth of Customs and Excise is projected to be modest at 1.7% next year (vs 3.5% in FY24), Excise revenue is expected to rise by 5.9% in FY25 (vs 3.9% in FY24). This increase is primarily driven by stricter enforcement against illegal excisable goods (BKC) and the introduction of excise on sweetened packaged drinks (MBDK). With nominal GDP expected to grow by 7.9% y-y in 2025, the government will need to explore additional revenue expansion avenues beyond the MBDK excise. Separately, while the Non-Tax Revenue is expected to continue its annual decline, dividends from SOEs are still anticipated to show slight growth of 0.2% y-y to IDR86tn.
  3. The Free Nutritious Food (MBG) Program is allocated IDR 71tn (0.29% of GDP) and will benefit 15.4 million recipients across 514 cities. This budget covers the costs of food, distribution, and operational expenses. The Education budget, set to increase by 24.3% y-y in FY25, will fund food costs for students in pre-school, elementary, and middle school, while the Health budget, which is rising by 5.4% y-y in FY25, will covers the nutritious food for expecting mothers. The government anticipates that this program will contribute 0.1 percentage points to GDP growth, supporting the overall growth assumption of 5.2% in 2025.
  4. Subsidies are projected to decrease slightly by 1.5% y-y FY25, largely due to a significant reduction in non-energy subsidies, which are expected to decline by 13.7%y-y after doubling in 2024 from pre-pandemic levels. However, there are notable increases in specific areas, with electricity subsidies anticipated to rise by 11.8% y-y and fertilizer subsidies also expected to grow. A significant burden comes from energy compensation, primarily allocated to maintain stable Pertalite prices. (Continued)

 

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The compensation budget is expected to reach IDR189.8tn, up 33.7% y-y in FY25, making it the second-largest increase after Regional Revenue Sharing. Infra budget saw 5% lower budget in FY25.

  1. The fiscal deficit for 2025 will remain stable at 2.5%, at the midpoint of the projected macro framework and lower from 2.7% deficit in FY24 outlook. In terms of value, the deficit will increase slightly from IDR610tn in FY24F to IDR 616tn. However, net SBN issuance is expected to rise significantly, from IDR451.9tn in FY24 to IDR642.6tn in FY25, 42% increase y-y. This increase is mainly driven by a substantial rise in investment financing, which will grow to IDR154.5tn (up 68% y-y), with significant allocations for education and reserve financing. In our view, this has led to relatively high SBN yield assumption of 7.1% in FY25. With this assumption, on bond auction, the target (per 2 auctions) will go up to IDR41tn (vs current IDR26.1tn).

 

The overall fiscal outlook for 2025 seems manageable, with projected growth in both spending and revenue that aligns with historical trends. The macroeconomic assumptions also appear conservative, with IDR set at IDR16,100 and average bond yield at 7.1%. However, some financial assumptions could be subject to revision, particularly in response to recent developments in the IDR and yields, before the draft is finalized into law in October. The focus on human development is reflected in tangible budget allocations, including IDR 71 trillion for the MBG program, IDR 20.3 trillion for school revitalization, and IDR 55 trillion for education investment (compared to IDR 31 trillion previously).

 

Capital Market – Stronger IDR Underpinned robust market performance

The yield on the 10-year US Treasury (UST) decreased by 5 basis points last week, bringing it down to 3.89% on wider expectation of rate cut. Meanwhile, the 2-year UST yield rose by 1 basis point to 4.06%. Similarly, the yield on the 10-year Indonesian Government Bond (INDOGB) dropped by 5 basis points, falling to 6.72%.

 

The U.S. Dollar Index down 0.24% last week, while Indonesian Rupiah appreciated by 1.48% to IDR 15,690 per US dollar. On similar vein, Indonesia’s 5-year Credit Default Swap (CDS) spread narrowed by 7 basis points, settling at 71 basis points as of August 16, 2024.

 

Fixed Income Flow: Strong Weekly Foreign Flow - Foreign ownership of domestic Government Securities (SBN) surged by IDR10.68tn w-w (as of 14th Aug data), with total ownership now reach IDR828tn. On the other hand, the banking sector continued to trim its position with another weekly outflow of IDR18.58tn. Bank Indonesia (excluding repo transactions) recorded an inflow of IDR27.73tn for the week, while mutual funds also saw weekly inflow of IDR1.59tn, while insurance and pension funds reported an inflow of IDR0.73tn.

 

Equity Flow: JCI hit ATH. In the second week of August 2024, foreign inflows totaled IDR 3.2 trillion, contributing to meteoric weekly 2.4% rise in the Jakarta Composite Index (JCI), hit an ATH level last week. Year-to-date, outflows in the regular market have reached IDR 9.5 trillion. On MTD basis, foreign inflows amounted to IDR5.2tn, with strong interest remains on BMRI, ASII, INDF, AMRT, KLBF, ICBP, ADRO, and JPFA as those stocks consistently attracted the highest inflows, while BBRI, TOWR, AMMN, MDKA, AKRA, and MAPI remained among the top outflows.

 

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