Indonesia at risk of higher fiscal deficits post-election: Fitch
Despite this, the credit ratings agency has kept the country’s long-term sovereign rating at ‘BBB’, with a stable outlook
[JAKARTA] Fitch Ratings said that Indonesia may struggle to maintain a balanced budget, and that its fiscal deficits could rise to 2.9 per cent next year amid uncertainties over the fiscal policies of the incoming president, Prabowo Subianto.
It added that there could be more medium-term fiscal risks, given the potential costs linked to fulfilling Prabowo’s ambitious campaign pledges. Despite these assessments, however, Fitch has kept Indonesia’s long-term sovereigns rating at “BBB”, with a stable outlook.
The head of Asia-Pacific Sovereigns at Fitch Ratings, Thomas Rookmaaker, referring to Indonesia’s having set a legal cap on the state budget deficit at no more than 3 per cent of the country’s gross domestic product, said: “The assumption for now is that the government will stay under 3 per cent, but the risk of higher deficits has increased post-election.”
Speaking at a seminar in Jakarta on Wednesday (May 15), he did not dismiss the possibility that if Prabowo fails to boost state revenues quickly, Indonesia’s fiscal deficit could surpass the 3 per cent cap, which works as a safeguard to prevent a repeat of the 1998 financial crisis.
Such a scenario could raise the country’s debt-to-GDP ratio, potentially impacting financial stability and national credit ratings.
Prabowo, slated to assume office by October this year, has pledged to uphold the initiatives of outgoing President Joko Widodo, which include the construction of the new capital city, Nusantara, in Kalimantan.
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Prabowo has also promised to provide free lunches and milk to Indonesia’s 80 million schoolchildren, in a drive to combat malnutrition and stunted growth among the young.
The 72-year-old said on the campaign trail that this programme is estimated to cost 400 trillion rupiah (S$33 billion) a year, but claimed that the state budget had enough to cover it.
Speaking at the same event, Indonesia’s Finance Minister, Sri Mulyani Indrawati, said that the government would prudently allocate the budget needed during the transition period in support of Prabowo’s administration.
Dr Sri Mulyani outlined that Indonesia’s economic policy direction would primarily focus on investment and infrastructure development: “We will prioritise policy directions that are essential for Indonesia, such as investing in human resources, enhancing value-added activities downstream, and increasing infrastructure investments.”
She disclosed plans to expand the fiscal deficit, but said it would not go beyond 2.8 per cent of GDP.
The Indonesian government has been striving to slash its fiscal deficit to navigate increasing borrowing costs and to manage its debt more efficiently, following major spending during the Covid-19 pandemic.
Last year, South-east Asia’s biggest economy booked a fiscal deficit of 1.65 per cent of GDP, the smallest during the pandemic.
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