This statement provides an update on developments since the staff report was finalized. It does not alter the thrust of the staff appraisal.
1. The latest data are in line with the staff’s projections. Domestic demand indicators remain strong, with consumer confidence, cement sales, and motor vehicle sales continuing to hold up, supported by robust credit conditions. Concerns about the widening current account deficit have, however, put some pressure on financial markets in recent weeks. The rupiah weakened by 0.8 percent during August 22–29, and equities and bond prices have drifted down moderately.
2. The government has submitted its initial 2013 budget proposal to parliament. The budget assumes real GDP growth of 6.8 percent and CPI inflation of 4.9 percent (y/y) in 2013. This compares to growth of 6.3 percent and inflation of 5.0 percent projected in the staff report. At 1.6 percent of GDP, the overall deficit target in the draft budget is slightly lower than the staff’s projection of 1.8 percent of GDP. The authorities are expecting revenues to grow by 12 percent relative to the 2012 revised budget. The draft budget also proposes to increase capital spending by 15 percent over 2012. While the budget proposal contains provisions for a modest hike in subsidized electricity prices, there are currently no plans to raise subsidized domestic fuel prices. Under current WEO oil price projections and the staff’s baseline macroeconomic assumptions, we currently project the energy subsidy bill to reach 3 percent of GDP in 2013, broadly unchanged from the staff report and consistent with the authorities’ own estimates.