Presidential candidate Prabowo Subianto waves to a photographer as he departs after attending a Corruption Eradication Commission (KPK) dialogue held at the KPK Headquarters in Jakarta, Indonesia, on January 17, 2024.
Willy Kurniawan | Reuters
Indonesia may struggle to meet its economic growth targets next year after spending 2026 on the defensive amid questions over fiscal spending and the prospect of a downgrade from MSCI.
President Prabowo Subianto wants to raise economic growth to 6% in 2027, while keeping the budget deficit at 2.4% of GDP. That means keeping the budget deficit below the legal limit of 3%, while accelerating from Indonesia’s 10-year average growth rate of about 5%. The budget proposal lists eight priority items, including food and energy self-sufficiency.
“They’re trying to accomplish too much too quickly,” said Ashok Bundia, deputy chief economist at the Institute of International Finance. “Some of these goals are a little too ambitious in terms of timelines.” Reaching 6% next year would likely require an “unexpected commodity boom” to boost exports, earnings and investment, he said.
The plan comes after index provider MSCI extended its review of whether Indonesia should be downgraded to a frontier market until November. The country has been exposed to concerns over fiscal spending, including Mr. Prabowo’s signature free meals program, especially after the resignation of respected Finance Minister Sri Mulyani, and concerns about the independence of the central bank since Mr. Prabowo’s nephew, Thomas Ziwandono, became deputy governor. The rupiah hit a record low against the dollar in June.
Gareth Leather, senior Asia economist at Capital Economics, said 6% growth would be a “huge leap forward”. Fiscal stimulus could boost growth, but the proposed budget shows little appetite for easing. Reza said monetary easing could provide “short-term economic stimulus” but that Bank Indonesia operates independently from the government. Any loss of its independence could “cost the country its credibility,” he added.
Yanuar Rizky, senior economist at the Bright Institute think tank, called the budget proposal “totally unrealistic”, citing the “fragile state” of purchasing power and the “rapid surge in online lending”. According to the Indonesian Financial Services Authority, the sector’s loan balance increased by 25.88% year-on-year in June.
He said it will be difficult to rely on tax revenue when purchasing power is supported by “depleted savings and high-interest debt,” and the slowdown in China will weigh on exports.
There are ways to achieve faster growth, including investment-led reforms.
Mr Bundia “encouraged” investment in solar power and pointed to its “multiplier effect” on long-term growth, while Mr Reza called for a “supply-side focus” through infrastructure spending and measures to attract foreign investment.
Investment-led reforms offer a path to faster growth. Bundia said that if the regulatory framework is right, “China’s slowdown is consistent with additional investment in Indonesia.” He also referred to “incentivizing” solar power investment and its long-term “multiplier effect.”
However, this forecast faces multiple challenges, including the Iranian conflict. Indonesia has pledged to keep subsidized fuel prices unchanged until 2026, but its budget could come under pressure if oil prices rise again due to supply disruptions or worsening military conflict.
Overall, Indonesia may need to emphasize discipline more generally to achieve its dual growth and deficit projections, but it remains to be seen whether policymakers can cross that line.
“The scale of the planned fiscal consolidation requires a focus on revenue generation and debt management efforts,” said Radhika Rao, senior economist at DBS Bank.
