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Home»Finance»Indonesia’s Prabowo Plans to Increase Debt to Fund Spending Plans
Finance

Indonesia’s Prabowo Plans to Increase Debt to Fund Spending Plans

July 11, 2024No Comments4 Mins Read
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Indonesia’s Prabowo Plans to Increase Debt to Fund Spending Plans
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Yesterday, the Financial Times published an article confirming that Indonesia’s incoming president Prabowo Subianto is planning to take on considerable debt in order to fund his ambitious spending programs.

The article quoted Hashim Djojohadikusumo, Prabowo’s brother and a prominent tycoon who is serving as one of his economic advisors, as saying that Indonesia may allow its debt-to-GDP ratio to expand to around 50 percent, up from 39 percent currently.

“The idea is to raise the revenue and raise the debt level,” Hashim told the FT. “I’ve talked to the World Bank and they think 50 percent is prudent.”

The article came amid a string of reports that the 72-year-old Prabowo is preparing to take on additional debt after he takes office in October, up to – and possibly beyond –the fiscal deficit and debt-to-GDP ratio ceilings imposed as a safeguard after the Asian financial crisis of 1997-1998.

Under Indonesia’s State Finance Law, which was passed in the wake of the crisis, the government’s annual budget deficit is capped at 3 percent of GDP and the debt-to-GDP ratio at 60 percent. Since then, fearful of a another mass flight of foreign capital, the country has maintained a generally conservative fiscal policy so as not to spook foreign investors.

As the FT noted, Hashim’s comments were the “first official confirmation of plans for higher borrowing.” Prabowo’s expansionary fiscal plans were first reported on June 14 by Bloomberg. Citing “people familiar with the matter,” it reported that the president-elect “aims to raise the debt-to-gross domestic product ratio by 2 percentage points annually over the next five years.” The local news magazine Tempo reported earlier this week, also citing unidentified sources, that Prabowo was also exploring ways to remove the fiscal deficit and debt-to-GDP ratio ceilings altogether.

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The purpose of taking on more debt is to fund Prabowo’s ambitious spending promises. Prabowo said in May that Indonesia should take on debt to fund development programs in order to achieve his extremely ambitious goal of increasing economic growth to 8 percent by the end of his five-year term. “I think we have the lowest debt to GDP figure in the world, one of the lowest. So now I think it’s time to be more daring within good governance,” he said, according to a Reuters report. Outside the COVID-19 pandemic, Indonesia’s growth has hovered around 5 percent per annum over the past decade.

Among the president-elect’s most prominent spending promises is a free lunch program for school children and pregnant mothers, which his team estimates will cost 71 trillion rupiah ($4.35 billion) in 2025. According to Bloomberg, this and his other welfare plans are expected to cost as much as 460 trillion rupiah ($28 billion) per year, more than the entire 2023 budget deficit.

The government also plans to continue with the development of the country’s new capital Nusantara, which is expected to cost $32 billion over the next couple of decades.

Unsurprisingly, recent media reporting about a break with the current conservative approach has unsettled the markets, with one portfolio manager telling Reuters that there are “more uncertainties than certainty” about the country’s economic direction. Thomas Rookmaaker, head of Asia-Pacific sovereigns at Fitch Ratings, also told the news agency that “risks have increased, especially over the medium-term.”

Hashim told the FT that the government would also seek to raise additional revenue from “taxes, excise taxes, royalties from mining and import duties,” which would help to offset the increase in spending. “We don’t want to raise the debt level without raising revenue,” he said. Hashim also expressed confidence that if Indonesia did this, the increase of its debt-to-GDP ratio would not impact the country’s investment-grade rating.

See also  Country Garden debt deal, China property support moves trigger relief rally
debt Fund increase Indonesias Plans Prabowo spending
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