Citi says Indonesia may breach 3% legal cap on deficit this year
The projection comes after South-east Asia’s biggest economy recorded a 2.9% of GDP budget shortfall in 2025
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[JAKARTA] Indonesia’s fiscal deficit is likely to widen well beyond its legal limit this year as the government ramps up spending on its nationwide free meals programme and the rebuilding of flood-hit provinces in Sumatra island, according to Citigroup.
Citi raised its budget deficit forecast to 3.5 per cent of gross domestic product in 2026, from an initial estimate of 2.7 per cent, economist Helmi Arman wrote in a note on Monday (Jan 12). The bank’s base case assumes the government will revise the State Finance law to loosen the longstanding 3 per cent fiscal deficit cap before the second half of this year.
The breach, however, may be avoided if authorities opt for sharp spending cuts to preserve fiscal discipline, Arman said. Indonesia’s debt-to-GDP ratio will rise to about 42 per cent by 2029, from an estimated 39 per cent in 2025, he added.
The projection comes after South-east Asia’s biggest economy recorded a 2.9 per cent of GDP budget shortfall in 2025, the widest in at least two decades outside the pandemic years. It underscored the mounting strain on state finances as soft economic growth and weak commodity prices hit revenue collections, at a time when President Prabowo Subianto has pledged to ramp up spending on his social and political programmes.
Citi expects that the free meals programme will be able to reach its full scale of 83 million beneficiaries by early second quarter, pushing costs to about 300 trillion rupiah (S$23 billion). Rebuilding Sumatra’s flood-hit provinces may require an estimated 60 trillion rupiah over an unspecified time-frame, according to Citi. That could also erode the government’s contingency spending buffers, funds parked outside the core budget to cover revenue shortfall or emergency costs.
Transfers to regional governments may be increased further as Prabowo seeks to push tough reforms this year, it added.
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Meanwhile, Bank of America aired concerns around Indonesia’s lacklustre revenue collection, even as it maintained its view that the budget deficit would be kept under 3 per cent of GDP this year.
The government’s target of increasing state revenue by 14 per cent annually in 2026 may be ambitious at the current run-rate, BofA economists Kai Wei Ang and Rahul Bajoria wrote in a note on Friday. Revenue collections shrank in the early months of 2025, and only a 16 per cent jump in December likely kept the budget deficit within the legal limit last year, they said.
Still, the government may tap the sizeable contingency funding allocated for 2026, or rein in spending plans, BofA said. BLOOMBERG
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