Prabowo’s transition pains emerge as drag on Indonesian growth
The same dynamics will likely keep growth below Indonesia’s usual 5 per cent pace this year, analysts say
[JAKARTA] While Indonesia’s economic growth was largely expected to slow in the first quarter, few predicted a key drag would come from President Prabowo Subianto’s new government.
Data released this week underscored the extent to which Prabowo’s order for billions of US dollars in spending cuts in the first months of his presidency effectively put existing government projects on hold without creating significant new drivers of growth. The money freed up for Prabowo’s signature programmes – including free school meals and public housing – remained largely unspent with programmes still in their infancy.
The state budget limbo that jammed up public spending also left private investment in a wait-and-see mode. Both factors played roles in pulling quarterly economic growth down to 4.87 per cent, Indonesia’s weakest since midway through the Covid-19 pandemic, even as consumer demand held up better than many expected.
The same dynamics will likely keep growth below Indonesia’s usual 5 per cent pace this year, analysts said.
“The construction projects of the past administration have largely finished while those initiated by the new government are still in preparation, leading to a contraction in public capex,” Citigroup economist Helmi Arman wrote in a note on Monday (May 5), referring to capital expenditure.
Growth in South-east Asia’s largest economy could slow further to 4.4 per cent in the second quarter, he added, given that government disbursements “will have barely recovered” while a global trade war keeps private capex at bay. Outside of the pandemic years, that growth would be the weakest quarterly print since 2009 during the global financial crisis, according to Bloomberg data.
A NEWSLETTER FOR YOU
Friday, 8.30 am
Asean Business
Business insights centering on South-east Asia's fast-growing economies.
“Fiscal policy is a key reason for our caution on the economic outlook,” said Barclays economist Brian Tan, who sees 2025 GDP growth at 4.8 per cent, well below the government’s target of 5.2 per cent. “The budget reallocation does not appear to have been completed, implying a continued fiscal drag on economic activity.”
Here’s what economists say:
Citigroup economist Helmi Arman
Indonesia’s gross domestic product growth would have been just 4.1 per cent in the first quarter if discounting the impact of a rice harvest season that was moved earlier this year.
GDP growth could rebound in the second half of 2025 if the government adds fiscal stimulus, possibly through ad hoc subsidies, handouts and tax cuts.
Barclays economist Brian Tan
Prabowo’s plan for a budget reallocation implies spending might eventually be made up for elsewhere once the government finalises its budget review.
“However, to the extent that the budget is reallocated to new programmes – such as the free meals plan or the public housing scheme – where new bureaucrats might struggle to get a grasp on the disbursement process, we believe government spending will be slow to resume.”
United Overseas Bank economist Enrico Tanuwidjaja
Expansionary fiscal policy will be the key to bolstering Indonesia’s economic growth, which UOB now sees at just 4.9 per cent this year, down from an earlier estimate of 5.2 per cent.
If government spending is directed to sectors that create a lot of jobs and have a huge multiplier effect on the economy, “these will then restore consumer and workers’ confidence, which will in turn increase domestic household consumption” and drive growth faster.
Malayan Banking economists Brian Lee and Chua Hak Bin
GDP growth could slow on all fronts in coming quarters, with domestic demand and investments potentially weakening further in the light of a weaker global outlook and trade risks.
“Potential regulatory changes, such as revisions to local content requirements – a discussion point of trade negotiations with the US – are adding to the uncertainty,” they wrote in a recent note. BLOOMBERG
Share with us your feedback on BT's products and services
