Cloud of uncertainty overshadows Indonesia’s fiscal, debt outlook

KUCHING (July 23): Significant uncertainty continues to surround the current policy manoeuvres related to Indonesian fiscal policy and government finance over the next five years, affecting analysts’ presumptions over its fiscal and debt outlook for the near future.

According to the team at RHB Investment Bank Bhd (RHB Research), since the beginning of this year, there has been various reports on the developments in the potential policy change in Indonesia’s fiscal condition and public debt.

The most significant contrast presented in these reports is the swing in government officials’ stance regarding the relaxation of the fiscal limit of three per cent of GDP and the gradual increase in debt levels to 50 per cent of GDP, it said in a thematic report on Indonesia’s economy today.

“his uncertainty arises from polarised views from different parties on fiscal policy guidance; the transition of power in government administration; and the selection of the next finance minister,” RHB Research said in the analysis.

It noted that the newly elected president, Prabowo Subianto, advocates higher government spending and debt levels to achieve a strong economic growth of eight per cent.

Prabowo’s aim in pursuing an expansionary fiscal policy was evident even before the election when he claimed during the second presidential debate that the government has no problem taking on more debt and reaching 50 per cent of GDP.

This continued in May when he suggested that Indonesia could be “more daring” with government spending to pursue priority programs, including the free lunch program.

In June, he announced plans to gradually increase Indonesia’s debt-to-GDP ratio by two per cent annually over the next five years.

“However, contradictions arise when several officials have denied the aforementioned claims and emphasised maintaining prudent fiscal management and adhering to the deficit ceiling,” RHB Research recapped.

“Thomas Djiwandono, a member of Prabowo’s synchronisation task force team, has denied plans to raise Indonesia’s debt to 50 per cent of GDP, claiming that it is not a formal policy plan.

“This is supported by Sufmi Dasco Ahmad, the head of the synchronisation task force team, who stated that the new government will adhere to the three per cent budget limit and maintain the debt-to-GDP ratio at the status quo.

“Meanwhile, Current Finance Minister Sri Mulyani Indrawati has also urged the upcoming administration to maintain fiscal prudence and sustainability while accommodating the programs to be implemented in 2025.”

The circumstances are further complicated by the current administration’s responsibility to prepare the draft of the 2025 State Budget.

Although Prabowo’s team has been invited to participate in drafting the State Budget through the synchronisation task force, RHB Research said the initiatives remain primarily led by the current administration.

For example, the allocated amount for the Prabowo priority free lunch programme (71 million rupiah) is significantly less than the initial projection of 300-400 million rupiah.

“Besides, the current projected fiscal deficit for 2025 is between 2.29 and 2.82 per cent of GDP, leaving little room for Prabowo to expand his expenditure.

“Nevertheless, according to Indonesian Law (Undang-Undang Nomor 17 Tahun 2007), the elected president has the authority to change the APBN that the previous government had prepared.

“For now, the new administration has enough political power to adjust the state budget to suit their programs better, as most seats in the DPR have expressed their support to the new government.”

Referring to the results of the vote conversion in the 2024 election to House of Representatives (DPR) seats, the four political parties supporting Prabowo-Gibran (Gerindra Party, Golkar Party, Democratic Party, and National Mandate Party) will control 280 out of 580 seats in the DPR, or 48.27 per cent.

In April, the National Awakening Party and Nasdem Party, who previously supported Anies Baswedan-Muhaimin Iskandar, stated their readiness to work with the Prabowo government.

If this coalition materialises, RHB Research said the upcoming regime will control 63.46 per cent of the seats in the DPR, making it easier to push for changes in fiscal policy.

Meanwhile, the selection of the finance minister introduces additional risks, as changes in this position can significantly impact fiscal policy continuity and investor confidence.

A key risk arises from the possibility of different priorities and approaches that a newly appointed finance minister might implement, potentially leading to shifts in fiscal policy direction.

“This can create uncertainty in financial markets, affecting bond yields and exchange rates. Investors typically prefer consistency and predictability in fiscal policy, and abrupt changes can lead to increased risk premiums and volatility.

“There is no clear indication of who will replace the finance minister, Sri Mulyani Indrawati. According to Bloomberg, Prabowo is considering a former banker as a candidate for the next finance minister.”