President Prabowo's Plan: Policies to Drive Indonesia Forward

Key Takeaways - Our Thoughts

1. We think that the increased debt issuance to fund spending may raise bond yields, making borrowing more expensive for government and private sector.

2. Shifting from energy subsidies to direct cash assistance targets low-income groups but risks higher energy costs for energy-reliant sectors.

3. Policies such as VAT hikes, fuel subsidy removal, and biodiesel promotion could drive inflation.

4. We are hopeful that investments in agriculture, food reserves, the downstreaming of key commodities, and housing subsidies will enhance tax revenue, stabilize food prices, and stimulate construction and industrial demand.

Indonesia’s new government, led by President Prabowo Subianto, has set its sights on significant national transformation. Known for his strong military background, he has prioritized economic growth, national security, and social welfare since taking office, all with the aim of elevating Indonesia’s global position and securing long-term prosperity.

The new government has introduced an ambitious agenda that reflects its vision for a stronger, self-reliant Indonesia. President Prabowo’s "Quick-Win" programs, designed to be implemented within the first 100 days, reflect his commitment to prompt action and delivering results early. The cost for these quick-wins is estimated to be around IDR 121 Tn.

Table 1: List of President Prabowo’s “Quick-Win” Programs

(Mega Capital Sekuritas and Setiawati, 2024)

Other than these 100-day programs, President Prabowo's administration is also rolling out several initiatives. While quick-win programs focus on immediate, visible impacts, the non-quick-win programs aim to be implemented during longer period.

Table 2: List of President Prabowo’s “Non-Quick-Win” Programs

(Trimegah Sekuritas, Mandiri Sekuritas, and Mega Capital Sekuritas, 2024)

Fiscal Policies adapted from Mandiri Sekuritas (2024):

• Modest Fiscal Deficit in 2025

The government proposes a 2025 budget deficit of IDR 616 Tn, slightly up from 2024’s IDR 620 Tn, with a lower deficit-to-GDP ratio of 2.5% (2024: 2.7%). GDP growth is forecasted at 5.2%, below the 8% target.

The smaller deficit may not provide enough stimulus to reach the 8% growth target but reflects the government's focus on fiscal discipline under Finance Minister Sri Mulyani.

• Expansionary Spending

The government is targeting 5.9% YoY expansionary spending for 2025, slower than this year's 9.3% due to a 5.5% drop in infrastructure spending to IDR 400 Tn. The Nusantara capital (IKN) budget drops sharply to IDR 148 Bn from 2024’s IDR 42.5 Tn.

• Stable Social Spending

Other than the free-meal program sourced from education and food security budgets, other social assistance programs like Family Hope Program (PKH), village funds, and food aid remain consistent. This ensures that low-income families maintain financial stability, which we hope to continue boosting consumption and demand for basic goods.

• Subsidy Remains Large

The government has increased 2025’s energy subsidy, suggesting stable subsidized fuel prices. However, non-energy subsidies are cut, with fertilizer support and subsidized microcredit (KUR) dropping from IDR 48 Tn to IDR 38 Tn.

The reduction in fertilizer and KUR subsidies may raise input costs for farmers, driving up food prices and hindering MSME growth, which could slow local economies. We remain hopeful that the increased energy subsidies will help offset these challenges.

• VAT and Sugary Drink Excise Being Considered

The government targets a 15.4% increase in VAT revenue due to the rate hike from 11% to 12%. Excise tax is expected to rise by 5.9% to IDR 244 Tn from 2024’s IDR 230.5 Tn, with sugary drink excise tax planned to have minimal inflationary impact.

While the rate hike could boost government revenue, we remain hopeful that its inflationary impact will be limited.

• Larger Debt Financing

The fiscal deficit is set to rise by IDR 6 Tn, while debt financing jumps by IDR 223 Tn to IDR 776 Tn, reflecting increased spending and limited cash balance withdrawals. Net bond issuance is projected to grow by IDR 191 Tn to IDR 643 Tn, with debt levels remaining around 39% of GDP.

However, the increase in bond supply without sufficient demand could lead to higher bond yields, making borrowing more expensive for government and private sectors.

• Optimistic Revenue Target

The government aims for a 6.9% revenue growth in 2025, up from 2024’s 0.7%, driven by a 12.3% tax revenue increase through reforms like new core tax system. Despite lower projected GDP growth of 7.8%, the tax-to-GDP ratio is set to rise to 10.2% from 2024’s 9.8%.

• The Establishment of Danantara (Daya Anagata Nusantara)

President Prabowo has canceled the planned inauguration of Danantara on November 7, 2024, due to the lack of a legal basis for the project.

President Prabowo's programs aim to stimulate immediate economic growth and address long-term challenges. While the "Quick-Wins" could impose short-term financial burdens, they hold the potential to provide significant social welfare benefits. Reforms, including changes to energy subsidies and tax policies could support economic growth. However, cuts to non-energy subsidies and the challenges of increased debt financing may present fiscal pressures that require careful management. With effective implementation and fiscal discipline, we are hopeful that the positive impacts of these programs will offset the potential negative outcomes, paving the way for sustainable economic growth, enhancing the overall welfare of the population, and ensuring a more prosperous future for Indonesia.

Juara Capital Indonesia, 29 November 2024