Indonesian President Prabowo Subianto has embarked on a series of populist economic measures in his first months in office, aiming to boost growth to an ambitious 8% annually, a target not seen in nearly three decades. While these measures have garnered significant public support, they come with steep costs and are putting pressure on the state budget, raising concerns among investors about sustainability.
Prabowo’s early decisions, which have overridden some of his ministers’ proposals, include scrapping plans to limit subsidized cooking gas distribution after public outcry and scaling back a planned tax hike following social media backlash. Additionally, he accelerated his flagship free meal program to cover all 83 million Indonesians by the end of the year, apologizing to those excluded in the initial rollout. He also raised the minimum wage by 6.5%, nearly double the legal adjustment.
These actions have resonated with the public, with Prabowo enjoying a record 81% approval rating. However, political analysts caution that while these moves are popular in the short term, they might be unsustainable in the long run. “Prabowo’s popularity remains high because he is seen as a Santa Claus distributing social assistance, which is more tangible than abstract policy,” said Aditya Perdana, a political lecturer at the University of Indonesia. “But to maintain this over five years is challenging.”
One of the key limitations on Prabowo’s ambitions is Indonesia’s legal cap on its budget deficit, which is set at 3% of GDP. The expanded food program, expected to boost growth by 0.7 percentage points, will add $6 billion to state spending. The decision to scale back the planned tax hike could result in a $4.6 billion revenue loss. Additionally, various aid packages, such as discounted electricity rates, income tax deductions, and free rice, continue to add to budgetary pressure.
Investors are closely watching Prabowo’s commitment to adhering to the budget deficit cap while pursuing his populist agenda. Recently, he ordered officials to claw back up to $19 billion in planned spending to fund priority initiatives like the free meal program. However, implementing these cuts may prove challenging, and the projected efficiency gains could be overly optimistic. “We see the possibility of prudence taking a back seat as populist spending takes center stage,” said Kunal Kundu, an economist at Societe Generale.
Prabowo’s policy moves underscore his focus on stimulating economic activity, particularly amid weak domestic demand. Household consumption, which makes up more than half of Indonesia’s national output, has been growing at less than 5% for the past five quarters, dampening overall growth. Bank Indonesia recently cited weaker household consumption and exports as factors in its unexpected policy rate cut, despite a declining rupiah.
Analysts have mixed views on the effectiveness of Prabowo’s measures. While some praise the timing of these pro-growth policies, given the external uncertainties from U.S. trade tariffs and weak domestic purchasing power, others emphasize that these policies alone may not be sufficient to drive sustainable growth. “It’s the right time for these pro-growth measures, but they will take time to filter through and impact consumption,” said Brian Lee, an economist at Maybank Securities.
Despite the optimism surrounding the measures, structural challenges remain. Analysts like Josua Pardede, an economist at PT Bank Permata, warn that relying solely on populist policies without broader reforms to employment and investment conditions may limit the long-term growth impact. Without addressing deeper economic issues such as underemployment and weak investment conditions, Indonesia’s path to sustained growth may be slow and bumpy.
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