Tenggara Strategics, Jakarta – Indonesia's president-elect Prabowo Subianto plans to fund his campaign promises by increasing the Indonesian debt-to-gross domestic product (GDP) ratio by 2 percentage points annually, potentially reaching 50 percent by the end of his term. In response to this unprecedented fiscal policy, Morgan Stanley downgraded its evaluation of Indonesia's equities to "underweight," forecasting short-term economic uncertainty.
This downgrade led to a sell-off among Indonesia's stock investors, causing the Indonesia Stock Exchange (IDX) composite index to drop by 0.08 percent on Wednesday, closing at Rp 6,850 (42 US cents).
Thomas Djiwandono, a senior aide to Prabowo's economic team, denied claims that the administration would push the debt ratio to 50 percent, emphasizing that no specific target has been set and that they plan to adhere to legal fiscal limits.
Legally, Indonesia's state budget can reach a debt-to-GDP ratio of up to 60 percent and a deficit of up to 3 percent of GDP, as stipulated in Article 12(3) of Law No. 17/2003 on state finances.
However, the Indonesian government is already heavily leveraged, with Prabowo's administration inheriting an estimated debt of Rp 2.4 quadrillion (US$150 billion), including Rp 800 trillion due in 2025.
Despite this, Prabowo has consistently argued that the Indonesian government is too austere with its fiscal policy. During his campaign, he stated that a debt-to-GDP ratio of 50 percent is acceptable.
Later, in May, he urged Indonesia to "be more daring" with its fiscal policies. He controversially suggested that the current fiscal deficit safety limit of 3 percent of GDP is arbitrary and expressed confidence that his ambitious programs could boost Indonesia's growth rate to 8 percent by 2027.
These statements have caused concern among rating agencies and investors, who fear that Prabowo's costly programs could undermine Indonesia's record of fiscal prudence. This prudence helped Indonesia weather economic crises such as the COVID-19 pandemic and the spike in gas prices triggered by the Russia-Ukraine conflict. Last year, Finance Minister Sri Mulyani reduced the budget deficit to 1.65 percent of GDP, the lowest in 12 years.
Economists in support of Prabowo argue that Indonesia's fiscal prudence has become excessive, stifling potential government initiatives that could benefit the welfare of the people. They contend that the limits set by Law No. 17/2003 were products of the Asian financial crisis of the 1990s, which triggered severe inflation and economic instability. While these measures stabilized the economy, critics argue they now act as barriers to transformative government initiatives.
As Indonesia prepares for Prabowo's presidency, investors will be closely watching how Prabowo's administration will strike a balance between ambitious targets and fiscal responsibility. With significant debts due and bold promises on the horizon, Prabowo's fiscal strategy will be pivotal in shaping Indonesia's economic future.
What we've heard
The commotion regarding the debt-to-GDP ratio approaching 50 percent, which has caused Morgan Stanley to downgrade Indonesia's stock rating, started from a news article by Bloomberg. According to our sources, Bloomberg conducted an on-the-record interview with Thomas "Tommy" Djiwandono for the purpose of the article.
Tommy indeed never directly mentioned the 50 percent figure. However, the figure was implied from his statement that noted an increase in debt by 2 percentage points annually. Considering that Indonesia's debt-to-GDP ratio at the end of 2024 is forecasted to be 39.3 percent, then 2 percentage point annual increase in 5 years means that the debt-to-GDP ratio will reach 49.3 percent in 2029, almost 50 percent.
However, in an interview with Reuters, Tommy denied that the figure was official, stating "Anything about debt levels, or going beyond the deficit is noise". The noise certainly had greatly annoyed the Finance Ministry, leading them to investigate how the 50 percent figure came to be reported.
Currently, the Prabowo-Gibran synchronization team is trying to extinguish the flames caused by Bloomberg's report. According to one source, this polemic is inseparable from the efforts of several teams within the Prabowo-Gibran national campaign team (TKN), who are competing to use the free lunch program as an instrument to show off and win the favor of president-elect Prabowo Subianto, to secure their own position.
[This content is provided by Tenggara Strategics in collaboration with The Jakarta Post to serve the latest comprehensive and reliable analysis on Indonesia's political and business landscape.]