'Too much too quickly': Indonesia's growth ambitions questioned by economists

Presidential candidate Prabowo Subianto waves to photographers as he leaves after attending a dialog held by Indonesia's anti-graft agency Corruption Eradication Commission (KPK) at its headquarters in Jakarta, January 17, 2024. Indonesia may have trouble meeting its economic-growth goals for the coming year, after spending 2026 on the defensive amid questions about fiscal outlays and the prospects of a downgrade from MSCI. President Prabowo Subianto wants to lift economic growth to 6% in 2027 while keeping the fiscal deficit at 2.4% of GDP. That would mean accelerating from Indonesia's roughly 5% decade-long growth average while keeping the deficit below its 3% statutory ceiling. The draft budget sets eight priorities, including food and energy self-sufficiency. "They're trying to achieve too much too quickly," Ashok Bhundia, deputy chief economist at the Institute of International Finance, said, adding that "some of these targets are a little bit overly ambitious on timelines." Reaching 6% next year would likely require an unanticipated commodity boom that lifts exports, revenues, and investment, he said. The plan comes as MSCI, the index provider, extended until November its review of whether Indonesia should be downgraded to a frontier market. The country faces concerns about fiscal spending, like Prabowo's free-meal program, and central-bank independence after Prabowo's nephew Thomas Djiwandono became deputy governor. The rupiah hit a record low versus the dollar in June. Growth at 6% would be a "huge leap," according to Gareth Leather, senior Asia economist at Capital Economics. Fiscal stimulus could lift growth, but the proposed budget points to little appetite for loosening. Monetary easing could offer a short-term boost, but Bank Indonesia operates independently of the government. Any erosion of that independence could come at the cost of the country's credibility. The budget's assumptions are "completely unrealistic," said Yanuar Rizky, senior economist at the think tank Bright Institute, citing the fragile state of purchasing power and a sharp spike in online lending. Outstanding financing in the sector grew 25.88% year on year in June. He said relying on tax revenues would be difficult when purchasing power is supported by depleted savings and high-interest debt, noting that China's slowdown would be a drag on exports. There are ways to achieve faster growth, including investment-led reforms. Bhundia pointed to encouraging solar investment and its multiplier effect on longer-term growth, while Leather called for a focus on the supply side through infrastructure spending and measures to attract foreign investment. Investment-led reforms offer a route to faster growth. However, projections face challenges, including the Iran conflict. Indonesia has pledged to keep subsidized fuel prices unchanged through 2026, which may strain the budget if oil prices rise again due to supply disruptions or worsening military confrontations. Overall, meeting the dual growth and deficit projections may require heightened focus on revenue generation and debt management efforts. It remains to be seen whether policy makers can balance these demands.