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UPDATE 2-Indonesia proposes $188 bln 2022 budget with shrinking fiscal deficit

* 2022 GDP growth target set at 5.0%-5.5%

* 2022 budget deficit f’cast at 4.85% of GDP; vs 5.82% in 2021 (Adds comments by analysts)

JAKARTA, Aug 16 (Reuters) - Indonesia’s president on Monday proposed a $188 billion budget for 2022 with a narrowing fiscal deficit and higher growth targets, but some analysts warn uncertainties over the COVID-19 pandemic could push the budget plans off the rails.

In his budget speech, President Joko Widodo told parliament the theme of next year’s budget would be to accelerate the economic recovery from the pandemic and strengthen structural reforms, with controlling COVID-19 still a main focus.

The 2022 budget proposal, amounting to 2,708.7 trillion rupiah ($188.30 billion), was slightly bigger than the 2,697.2 trillion rupiah spending predicted for this year.

The 2022 economic growth target was set in a range of 5% to 5.5%, up from 2021’s 3.7% to 4.5% estimate. The economy shrank by 2.1% last year, the first contraction since 1998.

“We will utilise all resources...to control the pandemic,” Jokowi, as the president is popularly known, said.

The budget proposal called for a deficit target of 4.85% of GDP, compared with this year's revised deficit forecast of 5.82%. Jokowi said the government was on track to bring the deficit down to under 3% in 2023 here to comply with current laws.

Josua Pardede, an economist with Bank Permata, said there was downside risk to the growth target if there was another wave of COVID-19 cases amid low vaccination rates.

“We project that the fiscal deficit will not be able to return to under 3% in 2023 because interest payments for debt will remain high and this cannot be offset significantly yet by tax revenues,” he added.

Rating agencies have warned any loosening of Indonesia’s hard-won fiscal discipline could bode ill for its credit ratings.

Bhima Yudhistira, a director at the Center of Economic and Law Studies, said the budget assumptions were “inconsistent and unrealistic”, with a rupiah at 14,350 per dollar and 10-year bond yield at 6.82%, near current levels, even as the U.S. Federal Reserve looks set to taper asset purchases. A tightening of U.S. monetary policy will likely trigger outflows from emerging markets.

Southeast Asia's largest economy pulled out of recession here in the second quarter, but COVID-19 mobility restrictions imposed since early July will undermine momentum.

For next year, Jokowi proposed 255.3 trillion rupiah in health spending, including on testing, tracing and treatment of COVID-19 and vaccinations, as well as 427.5 trillion rupiah for welfare and 384.8 trillion rupiah for infrastructure.

Jokowi targeted a 6% increase in revenues next year, though he did not mention any specific tax measures, despite an ongoing debate in parliament on proposals to raise some taxes.

To fund the 2022 deficit, the government has proposed 991.3 trillion rupiah of bond issuance, excluding for refinancing, buybacks and short-term treasury notes.

Parliament is expected to vote on the budget in late September or early October. ($1 = 14,385.0000 rupiah) (Additional reporting by Fransiska Nangoy and Stanley Widianto; Editing by Lincoln Feast and Ed Davies)

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