Jakarta. The government’s proposed rupiah assumption of Rp 16,800-Rp 17,500 per US dollar for the 2027 state budget is too optimistic, an economist said, as the currency is currently trading around Rp 17,900 and has breached Rp 18,000.

Yusuf Rendy Manilet, an economist at the Center of Reform on Economics (CORE) Indonesia, said the government should adopt a more conservative exchange rate assumption to prevent the 2027 state budget from being built around overly optimistic expectations of rupiah appreciation.

“The rupiah is currently around Rp 17,900 and has even reached Rp 18,000. The upper limit of the assumption has already been breached even before the fiscal year begins,” Yusuf said when contacted on Wednesday.

He said a significant reversal in market conditions would be needed for the rupiah to return to the proposed range of Rp 16,800-Rp 17,500 per dollar. Such a recovery would depend partly on monetary easing in the United States, easing geopolitical tensions and an improvement in Indonesia’s current account balance.

Yusuf said the government’s policy to improve the management of export proceeds in foreign exchange, known as DHE, remains positive for the domestic foreign exchange market. However, he said its impact would be greater on market depth than on the rupiah’s underlying fundamentals.

“The argument about improving the management of export proceeds is not wrong, but its impact is more on the depth of the foreign exchange market rather than changing the fundamental direction of the rupiah,” he said.

Yusuf recommended that the government instead use a more conservative midpoint assumption of around Rp 17,500-Rp 17,800 per dollar. He said this would help ensure state spending components, including subsidies and debt-interest payments, are not based on an overly strong rupiah projection.

President Prabowo Subianto is scheduled to deliver the government’s statement on the 2027 state budget bill and its financial note on Friday, Aug. 14. The address will set out the government’s macroeconomic assumptions and fiscal policy direction for next year.

The exchange rate is particularly important because rupiah movements can affect several components of the state budget, including subsidies and debt-service costs. With the currency still vulnerable to external pressures, the government should also prepare scenarios for a weaker rupiah than the assumption used in the budget, Yusuf said.

“Overall, I see the 2027 draft state budget’s macroeconomic assumptions as leaning optimistic, particularly on two interrelated variables: economic growth and the exchange rate,” Yusuf said.

He pointed to a potential inconsistency between the government’s growth target and its rupiah assumption. Faster economic growth requires higher investment and imports of capital goods, which under certain conditions could put additional pressure on the rupiah.

Yusuf therefore urged the government to adopt more realistic macroeconomic assumptions to reduce the risk of significant pressure on budget implementation if external conditions diverge from the government’s projections.

“A budget based on realistic assumptions is easier to execute throughout the year than an ambitious budget that ends up being revised midway through. Fiscal credibility is built through that kind of consistency,” he said.

Add as a preferred source on Google +