Round one of Indonesia's 2006 budget

As Indonesia''s economy slows, politicians still remain optimistic.

Last week, Indonesia's President Susilo Bambang Yudhoyono presented to parliament a draft 2006 budget which may be a tad optimistic - but no worries, it's just the start.

"I haven't seen a budget that stays the same in a year yet," notes Joseph Tobing a research analyst for Merrill Lynch. "You can always change it later."

Yudhoyono's proposed 2006 budget includes expectations that the deficit will come in at 0.7% of GDP from 1% in 2005. He forecasts the tax income ratio to GDP will rise to 13.4%, up from 13.2%.

Total domestic financing is expected to be 1.9% of GDP up from 1.2% in 2005. Other non-bank financing is expected to be 1.1% of GDP, which is broadly in line with the levels seen this year.

On external financing, total amortization could reach $6.4 billion, which should be slightly offset by around $3.2 billion in loans. The bulk of these loans have historically been multilateral and CGI-related loans, which tend to carry below commercial-market rates.

Foreign direct investment (FDI) may help the economy. According to the Investment Coordinating Board, FDI increased 70% to $3.35 billion in the first half of the year.

But Susilo's budget is nonetheless a tad hopeful. For one, he forecasts the currency to strengthen to Rp9,400 to the US dollar. But analysts say an average of Rp9,700 to the dollar is more realistic.

The budget also proposes cutting fuel subsidies, down to 2.5% of GDP from around 4% in 2005. But with a barrel of oil costing more than $60, this may be difficult.

Meanwhile, the oil production target of 1.075 million barrels per day (mbd) is also optimistic. Current production is about 0.96 mbd, well below the OPEC quota of 1.2 mbd. JPMorgan analysts expect that production will recover slightly, thanks to new oil investments, but it still won't meet production targets.

Still, amidst these sunny assumptions the economy is slowing. Last week the Central Bureau of Statistics announced that Indonesia's economy, the largest in Southeast Asia, had expanded 5.5% from April to June, year-on-year, at the lower end of analyst forecasts due to rising fuel prices.

Analysts say Indonesia's economy shifted into a lower gear thanks to rising fuel prices, which triggered a domino effect of higher inflation and key interest rates, all of which dampened consumer spending.

Indeed, inflation in the country was 7.84% as of July after the government increased domestic fuel prices in March.

But while budget ideas were floated, number crunching was also temporarily set aside last week so that Indonesia could celebrate its 60th anniversary of independence. And like all good parties, there were a few presents on hand.

For one, Dutch foreign minister Bernard Bot attended the ceremonies in Jakarta on August 17 -- no Dutch minister has ever attended Indonesia's independence day celebration before.

Plus, Hutomo 'Tommy' Mandala Putra, the youngest son of former president Soeharto, was granted another sentence remission. In June, the Supreme Court decided to reduce the prison sentence from 15 years to 10 years for multiple crimes, including ordering the murder of Supreme Court justice Syafiuddin Kartasasmita. On August 17 he was given an extra one year five days reduction. His sentence is expected to end in 2009, but officials say they could propose a conditional release in 2007 as long as he "behaves well in prison and was not involved in other cases."