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Wider 2025 budget deficit seen as double-edged sword
Fitch Ratings forecasts debt financing expansion to fund Prabowo’s big-ticket plans, which would bring Indonesia’s budget deficit close to the legal limit but could also spur growth through increased economic activity.
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President-elect Prabowo Subianto waves on March 21, 2024 while delivering a speech in Jakarta, after the General Elections Commission (KPU) announced the official results of the 2024 general election. (Reuters /Willy Kurniawan)
F
itch Ratings projects an expansion in Indonesia’s debt financing next year when president-elect Prabowo Subianto’s big-ticket plans are accounted for, bringing the budget deficit close to the legal limit, which analysts say poses great risks but could also yield high rewards.
Thomas Rookmaaker, head of Asia-Pacific sovereigns at the multinational credit rating agency, revealed on Wednesday that it forecast a budget deficit equivalent to 2.9 percent of GDP for 2025, which would mark “quite a big jump” from the 1.65 percent logged in 2023.
Rookmaaker expected the incoming administration would “try to spend as much as possible” to fulfill Prabowo’s campaign promises, “including the free milk program”, but the budget deficit would “stay just under the 3 percent” cap.
Law No. 17/2003 on state finances mandates the state budget deficit, the shortfall that occurs when the government spends more than it collects from taxes and other revenue sources, must not exceed 3 percent of GDP in a fiscal year. It also limits the country’s accumulated debt to a maximum of 60 percent of GDP.
These restrictions are meant to ensure fiscal policy discipline to prevent a monetary crisis, like the one that hit the country in 1997 and 1998.
Since the law’s passage, Indonesia has not breached either limit, except during COVID-19, when the government temporarily lifted the deficit cap to alleviate the pandemic’s economic impacts by preemptively amending the 2003 law.
The policy measure pushed the fiscal deficit to as high as 6.14 percent of GDP in 2020 while the debt-to-GDP ratio rose to almost 40 percent, but stayed well clear of the 60 percent limit.
