Grace Sihombing and Claire Jiao – Indonesian President Prabowo Subianto doubled down on a push to slash spending and reallocate funds to his signature social programs, criticizing opposition from "little kings" even as concerns rise that the cuts could prove a drag on Southeast Asia's largest economy.

The former general on Monday said he would make good on campaign pledges to fund social welfare programs despite "those who are against me."

"In the bureaucracy, there are those who already feel immune to the law, who feel like they have become little kings," he said in an address to the Islamic organization Nahdlatul Ulama, without elaborating on the source of opposition to his plans. "I want to save money, and that money is for the people."

In recent days, spending by ministries, agencies and local governments has been largely frozen, with some offices switching off lights and suspending elevators. Officials are under orders to come up with as much as $19 billion in spending cuts to free up money for Prabowo's populist programs, including school renovations, free lunches for students and free health screenings.

That scale of reallocation – roughly 8.5% of planned state spending this year – could limit public sector services and halt some infrastructure projects, analysts say.

Speculation over which programs could be cut has added pressure on Indonesia's benchmark stock index, which fell 1.75% on Tuesday and is headed for its lowest level in nearly two years. The index has shed 8.1% this month on a spate of poor bank earnings and foreign outflows, making it the region's biggest loser.

"Equity investors are worried that the budget cuts will degrade public sector performance, especially in infrastructure development," said Lionel Priyadi, macro strategist at PT Mega Capital Indonesia in Jakarta.

Industries like construction, travel and accommodation may be the most directly affected, as they tend to benefit from government spending and travel, analysts said. Corporate earnings could also be hit by softer demand, and the social programs of Prabowo, who took office in October, are in their infancy and may not soon offset lower state spending.

Significant cuts in government routine and capital spending "could drag down confidence and domestic private sector capex, slowing down domestic demand more broadly," Citigroup economist Helmi Arman wrote in a recent note.

The quest for savings in the country of more than 280 million people has left some ministers scratching their heads to cut budgets that were made partly with input from Prabowo's camp in the wake of his election win early last year.

The Ministry of Public Works last week warned that cuts would be disruptive, with both single-year and multi-year contracts at risk. The economic affairs ministry last week began turning off more office lights, while a national civil service agency cut the number of elevators in service.

Indonesia's national library briefly considered shortening its hours and closing on weekends and holidays until citizens complained on social media.

The Ministry of Public Works was asked to claw back almost $5 billion, or more than 70% of its planned spending, raising questions about maintenance and plans to move Indonesia's capital to the island of Borneo.

Even ministries core to Prabowo's agenda are affected. The health ministry may reduce the procurement of medicines and vaccines, while the higher education, science, and technology ministry may reduce some research programs.

Some officials have been left scrambling amid requests for greater clarity. The president's office was forced to deny reports that the government could scrap holiday allowances and civil servant bonuses, which are crucial to consumer demand.

Indonesia's parliament, which has been discussing the proposed reallocations, has sought to postpone talks, with the deputy speaker citing possible changes to the president's initiative, according to Tempo, a local media outlet.

From a bond market perspective, the cuts could ensure that the budget deficit stays within legal limits and potentially lead the government to reduce its borrowing this year, Mega Capital Indonesia's Priyadi said.

And the president's initiatives could boost sectors related to his priority projects, such as agriculture and food processing. But that will take time.

"There is a big quandary as we ponder the growth outlook" in the first half of the year, said Barra Kukuh Mamia, head of macroeconomic research at PT Bank Central Asia. "The need to reallocate resources could lead to a short-term growth 'valley' before the positive effects would be felt."

Source: https://uk.finance.yahoo.com/news/prabowo-slams-little-kings-indonesian-023335920.htm