By Gibran Naiyyar Peshimam, Gayatri Suroyo and Stefanno Sulaiman
JAKARTA, Feb 10 (Reuters) – Inside Indonesian President Prabowo Subianto’s administration, officials are doubling down on his contentious growth and spending policies, despite recent moves from global financial agencies that shook markets and prompted outlook downgrades.
Confidence in Indonesia, a $1.4 trillion G20 economy and critical global commodities supplier, has waned in recent months as investors have grown wary about Prabowo’s big spending plans on social initiatives like a $20 billion free meals programme and efforts to stimulate rural economies across the archipelago.
A warning late last month from index provider MSCI swept $120 billion away from Indonesian equities and unleashed a wave of notes and comments from international banks, brokers and other institutions that had been quietly worried for some time. Days later, Moody’s cut its bond-rating outlook for Indonesia’s government and companies to negative.
While the government is moving to address stock ownership and market-transparency concerns, three sources familiar with internal discussions said the Prabowo administration has no intention of backing down on its broader promises, like the free meals plan and a pledge to lift growth to 8% from around 5%, where it has hovered for years.
“We are at a point of no return as those have become government programmes,” one source said, speaking on the condition of anonymity as they were not authorised to speak to the media, when asked if the government will change its fiscal strategy in the wake of Moody’s and MSCI’s concerns.
HARD LINE
Investors worry that fiscal deficit control, which has underpinned investor confidence in the country since the Asian financial crisis of the late 1990s, is no longer a top priority for Prabowo, a former military general who won the 2024 election based on promises of government largesse.
The fiscal deficit for 2025, at 2.92%, was the highest in more than two decades excluding the COVID-19 pandemic years.
“Greater focus on using public spending to drive growth poses fiscal risks, particularly given Indonesia’s weak revenue base,” Moody’s said in its statement when it cut Indonesia’s outlook to negative from stable last week.
Responding to those concerns on Monday, Prabowo spokesperson Prasetyo Hadi said the government was confident about its fiscal management and the deficit was still below the mandated 3% limit.
“We will boost government spending as much as possible at the beginning of the year,” he said.
Internal messaging, however, suggests the 3% limit is less important than achieving the administration’s growth goals.
A second source said that, while the government values the maintenance of deficit limits, it could look to raise revenues or reduce spending in other areas rather than cut back on programmes it believes are key to growth. The government, the source said, was confident and global institutions’ “misplaced” nervousness would not dictate policy.
The current economic expansion, while steady, has not been sufficient in catering to the growing employment needs of the world’s fourth most populous country, the source added. Last year, Prabowo fired long-time Finance Minister Sri Mulyani Indrawati – known for enforcing fiscal discipline across multiple presidencies – and brought in pro-growth economist Purbaya Yudhi Sadewa.
A third source also said there was little chance that spending would be cut as it would affect growth targets.
8% OR BUST
Prabowo intends to boost the economy as quickly and as much as possible, said Yanuar Nugroho, a former senior aide to Prabowo’s predecessor, Joko Widodo.
Yanuar said Prabowo’s policies broke with the strategies of successive governments since the late 1990s financial crisis.
“I think he is, I don’t know whether consciously or unconsciously, undoing many of the reforms,” said Arianto Patunru, an economist with the Australian National University Indonesia Project, which is based in Canberra.
“The source of everything is his ambition to reach 8% growth,” he said, adding that the programmes were actually anti-growth in the longer term.
“He translated the 8% growth ambition into major policies: his signature free meals, red-and-white cooperatives, the housing programme, and then he has Danantara … all of this really put pressure on the budget.”
POPULIST BENT
“On the fiscal side, the current leadership have a populist bent,” said Alan Siow, the co-head of EM corporate debt at fund manager Ninety One, adding that “as investors, we never like it when governments give out goodies, particularly when they cannot afford to fund them.”
Siow said not enough had been done to address fiscal concerns: “They’re saying all the right things, but not doing all the right things.”
Some analysts believe the Prabowo strategy would require major reforms.
“Achieving this goal (8% growth) will require massive state support that can only be achieved through a significant increase in deficit spending or much higher tax revenues,” said Thomas Pepinsky, a professor of government and public policy at Cornell University.
“Such reforms would require compromises and hedges that will undermine investor confidence,” he added.
And there is a lot on the line for Indonesia because, as U.S. rates fall, global money is pouring into emerging markets.
If the issues raised by MSCI go unaddressed, a downgrade to frontier from emerging status could trigger a wave of capital flight of as much as $7.8 billion, according to Goldman Sachs.
“(Prabowo) would be wise to recalibrate his policy agenda to reflect changing global economic realities, but I think it very unlikely that he will,” Pepinsky said.
(Reporting by Gibran Peshimam, Ananda Teresia, Gayatri Suroyo and Stefanno Sulaiman in Jakarta; Additional reporting by Karin Strohecker in London; Editing by Josh Smith and Thomas Derpinghaus)
