Prabowo's Economic Vision: Ambitious Targets and Fiscal Debates for 2025

Indonesia's parliament has set ambitious economic targets for 2025, amidst a challenging global and domestic economic environment. This comes at a time when local media has reported that the president elect- Subianto Prabowo seeks a removal of the fiscal debt ceiling. Following Indonesia's recovery from the Asian Financial Crisis, the government had introduced a fiscal deficit ceiling target of 3% of GDP and an external debt target of 60% of GDP. In our view, this is unlikely to go through but cannot be ruled out entirely. However, for now, our understanding is that the finance committee will not be in favour of this move. 

Meanwhile, the finance committee (DPR Committee XI) has tasked Bank Indonesia (BI) with strengthening the rupiah, setting a target exchange rate range of US$/IDR 15,300-15,900 for the 2025 budget bill. This target, significantly lower than the current levels of around US$/IDR 16,400, aims to restore confidence in the national currency. To achieve this, BI has been instructed to utilize its "triple intervention" strategy, which includes interventions in the FX spot market, the domestic non-deliverable forwards (DNDF) market, and the secondary market for government securities (SBN). Additionally, BI will continue its rupiah stabilisation operations through its own IDR-denominated securities, FX-denominated BI securities, and FX-denominated Sukuk bonds to attract foreign exchange inflows. The IDR hit its lowest point in four years UD$/IDR 16445 in June, following a strong performance by the US$ as the Federal Reserve hinted at a longer pause. Additionally, fears around Indonesia's fiscal health, as Prabowo hints at increased spending has made investors cautious and caused an outflow of funds. Furthermore, Indonesia's declining trade surplus and BI's intervention to support the IDR since the start of the year has dented the country's foreign exchange reserves significantly. Indonesia's trade surplus declined 22.5% y/y in H1-2024, to US$ 15.4bn. Meanwhile, Indonesia's foreign exchange reserves stood at US$ 140.2bn in end-June accounting for about 6.3 months of imports. 

In terms of macroeconomic targets, the parliament has set a GDP growth target of 5.3-5.6% for 2025. This target comes after consultations with key economic stakeholders, including Finance Minister Sri Mulyani Indrawati, BI Governor Perry Warjiyo, and the head of the National Development Planning Authority (Bappenas), Suharso Monoarfa. This growth target will be integrated into the government's working plan (RKP), marking the initial step toward approving the macroeconomic framework for 2025-2029. The finance committee has also approved other fiscal and macroeconomic targets, including a fiscal deficit target of 2.29-2.82% of GDP, which reflects higher projections for state revenues and is lower than the government's original target of 2.45-2.92%. However, the government also revised the fiscal deficit estimate for 2024 upwards to 2.7% of GDP. This is driven by higher spending plans over H2. The increased expenditure will encompass energy subsidies, which are projected to be higher than initially anticipated due to the depreciation of the rupiah and its effect on oil and gas imports. Additional funds will also be allocated to fertiliser subsidies for the agricultural sector and to expand the rice social aid programme

Meanwhile, inflation is expected to remain within the central bank's target band of 1.5-3.5%, indicating a stable price environment. The unemployment rate is projected to stay below 5%, while gas production is expected to exceed 1 million barrels of oil equivalent per day (boepd). Additionally, the poverty rate is anticipated to drop to 7-8%. While there are differences in the GDP growth and fiscal deficit targets between the finance committee and the government, these are expected to be aligned in upcoming meetings and be approved by the parliament. In our view, Indonesia has set ambitious targets in terms of fiscal spending and the strategy involves boosting revenue while simultaneously raising debt levels to maintain Indonesia's investment-grade rating. The Prabowo team anticipates that the additional revenue would come from taxes, excises, royalties, and import duties. This is aligned with Prabowo's earlier statements of pursuing economic growth targets of 8% annually. In our view though, this appears overly ambitious. We anticipate increasing fiscal spending and higher fiscal deficit and debt/GDP ratio but economic growth of 8% is unlikely. Additionally, supporting IDR in the near term will be challenging for BI, but the exchange rate is likely to trend down over Q4-2024.