Oil Plunge means Bad News to Indonesia’s Economy

1 year ago . 3 min read
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Ardian Wibisono
Author of forbes indonesia
Oil Plunge means Bad News to Indonesia’s Economy
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By Elisa Valenta

For the first time ever, the US oil prices plunge below $0 on Monday, April 20, as demand dries due to COVID-19 outbreak. The contract for West Texas Intermediate crude (WTI), which is the benchmark for US crude oil prices, crashed from $17.85 a barrel to minus $37.63.

That means, instead of getting cash, oil producers are paying buyers to take the commodity off their hands. Producers fear that their storage capacity could run out in May and keeping the oil will bring more burdens.

The oil market has been under pressure due to the weak fuel consumption and dreadful forecasts from the Organization of the Petroleum Exporting Countries (OPEC). As many are aware, earlier this month, OPEC and its allies agreed to its most significant ever production cut by 9.7 million barrel per day starting in May. The decision is aiming to curb oil oversupply as stay-at-home orders and business furloughs erode fuel demand.

Despite being a net oil-importing economy, Indonesia still exports crude oil overseas and revenues from oil-and-gas (O&G) activities contribute heavily to the fiscal balance. Finance Ministry acknowledges that a drastic fall in oil prices would undoubtedly affect the country's economy and creates a burden on the state budget. In the state budget macroeconomic assumption, the oil price is expected to be at $63 per barrel. However, in the government's worst scenario, the oil price could reach $31 per barrel, and the rupiah exchange rate stands at 20,000 to the US dollar. Thus, the collapse in the oil price could likely enlarge the budget deficit just as the economy needs more fiscal spending to boost growth.

As per March, Indonesia's tax revenue contracted 2.5% to Rp 241.6 trillion. The deficit was mainly driven by weaker collection from the oil and gas sector. Meanwhile, Indonesia's non-tax state revenue from the oil-and-gas industry is projected to reach only $6.7 billion, 53.7% lower than initial expectations. The government also has outlined a worst-case scenario where the domestic economy contracts by 0.4% as the COVID-19 pandemic arrests swaths of economic activity.

"But we will see this oil trend until the end of 2020. So it's not daily or weekly for now," says Finance Ministry Director General of Budget Askolani.

Analyst from Bahana Sekuritas Satria Sambijantoro also notes that the oil price crash might also give a negative impact on Indonesia's current account. Indonesia recorded a $ 15.1 billion deficit in the oil trade balance last year, and the common belief is that a lower oil price might be beneficial to the economy. Yet there are also risks associated with the latest oil price crash.

"According to our estimates, the halving of the average ICP from $ 63 per barrel in the State Budget's assumptions to the current oil price could easily compress state revenues by Rp73.88 trillion, widening the fiscal deficit by 0.60-0.65% of GDP," he says.

Enrico Tanuwidjaja, Economist and Senior Vice President Global Economics and Market Research of PT Bank UOB Indonesia expects the oil price will remain low in the longer term, ranging from $20 to $35 per barrel. In the long run, he says the low price of oil will reduce appetite for investment in the oil industry.

“If the current low price lessen consumers demand for alternative energy sources, demand for oil will pick up and increase the oil price again," Enrico says.



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Written By
Ardian Wibisono
Author of forbes indonesia
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Business