Delivering the annual State of the Nation Address before the People's Consultative Assembly (MPR) on Aug. 26, President Jokowi outlined his 2024 targets of achieving 5.2 percent economic growth, around the same level as this year’s target, while reducing the poverty rate to 6.5-6.7 percent (from 9.36 percent as of March 2023), the unemployment rate to 5.0-5.7 percent (from 5.45 percent in February 2023), and decreasing the Gini index on income inequality to 0.374-0.377 (from 0.388 in March 2023).

To achieve these targets, Jokowi has proposed boosting next year’s budget spending by 8 percent to Rp 3.304 quadrillion (US$220.27 billion), up from 3.061 quadrillion in this year’s budget. Meanwhile, his administration aims to collect total revenues of Rp 2.781 quadrillion to result in a budget deficit of Rp 522.8 trillion, or 2.29 percent of the country’s gross domestic product (GDP), around the same as this year’s deficit.

Jokowi plans to finance the deficit primarily by issuing government bonds or sovereign debt papers (SBNs) totaling Rp 666.4 trillion, almost double this year’s projected SBN issuance of Rp 362.9 trillion. In addition to SBNs, the government plans to draw domestic loans of Rp 600 billion and foreign loans of 17.7 trillion in 2024. But next year’s debt financing target is actually lower than this year’s at Rp 696.3 trillion.

In addition to debt, the 2024 state budget includes a contingency allocation fund of Rp 203.6 trillion and $13 billion to cover the government’s guarantee for infrastructure projects, in case the project owners default on their debts. (See What’s more)

In terms of spending, the biggest portion of next year’s budget is slated for education at a total of Rp 660.8 trillion, the highest ever. This huge education budget is intended to fund programs that increase teachers’ competence, improve education access at all levels, strengthen ties between vocational education and the job market, and increase spending on research and development.

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The next biggest portion goes to social protection with a total of Rp 493.5 trillion to cover social safety nets, targeted subsidies, improved data on subsidy beneficiaries through the Social Economic Registration (Regsoses) single system, and the elimination of extreme poverty by 2024. In addition, the government has allocated Rp 52 trillion to finance the salary increases Jokowi promised for civil servants, members of the military, police personnel and pensioners.

Jokowi’s signature infrastructure development policy will continue to receive big funding from the state budget, with Rp 40.6 trillion allocated for the accelerated physical development of the Nusantara Capital City (IKN) project in East Kalimantan.

What’s more

Following are the infrastructure projects that carry government guarantees and therefore contingency allocations in the case of defaulting project owners.

1. 10,000-megawatt projects with a government guarantee valued at Rp 40.89 trillion and $3.9 billion. The risk is that PLN might not be able to pay its obligations to creditors and Independent Power Producers (IPP) on time due to delays in disbursements of the government’s electricity subsidy.
2. Clean water projects with a government guarantee value of Rp 624.7 billion. Four out of 10 regionally owned water companies (PDAM) have a risk of not being able to pay their debts on time. The six others have paid their debts.
3. Six toll road sections already operating on Sumatra, with government guarantee values of Rp 54.93 trillion and $600 million. These road sections are: Medan-Binjai, Palembang-Indralaya, Bakauheni-Terbanggi Besar, Pekanbaru-Dumai, Terbanggi Besar-Pematang Panggang, and Pematang Panggang-Kayu Agung.
4. Six toll roads on Java, with a government guarantee value of Rp 68.53 trillion. The risks related to all toll roads on both Sumatra and Java include government delays in land acquisition and tariff adjustments.
5. The Central Java Power Plant public-private partnership project, with a government guarantee value of $4.2 billion.
6. Foreign direct lending to state-owned enterprises (SOEs) to develop infrastructure projects, with government guarantee values of $3.6 billion and 1 billion euros. These infrastructure SOEs carry a risk of defaulting on their foreign debt payments.
7. Syndicated loans for state-owned railway company PT KAI to finance the Jakarta LRT project, with a government guarantee value of Rp 23.41 trillion. KAI carries default risks in servicing its debts.
8. Accelerated electricity infrastructure development, with a government guarantee value of Rp 15.17 trillion. This project is funded by state-owned infrastructure financing company PT Sarana Multi Infrastruktur, which is covered against the risk of default or late payment among local administrations.

What we’ve heard

Several market observers believe that the debt-to-GDP ratio cannot be the sole benchmark to measure the health of Indonesia's government debt. What better reflects the burden is the ratio of expenses to pay interest against the total APBN. The problem is that the government is often suspected of evading the issue of interest payments.

Meanwhile, the obligation to pay interest next year will consume about 20% of the central government's expenditure. The government bears significant burdens to manage its debt. Especially if these debts are channeled into pioneering projects whose benefits cannot be immediately felt.

Within the market participants, ambitious projects like IKN or stalled infrastructure will not drive the economy forward. They have minimal impact on society. On the other hand, the budget has largely been used for routine purposes such as paying civil servants' salaries and interest payments. As a result, the effectiveness of the debt in stimulating growth is questionable.

What captures the attention of market participants the most is the budget for IKN and subsidies for the high-speed train, which have been repeatedly promoted by President Jokowi.

The government also appears to have been overly reliant on the trade surplus. Amid global uncertainty, the additional income from taxes and export royalties from natural resources this year might not be as substantial as last year.

In the market, the yields on 10-year government bonds continue to rise. This strategy is meant to attract investors, but it indicates that the government will need to allocate more funds to repay the incoming investment. Consequently, this will impose a significant burden on the budget. The issue is that foreign investors are increasingly leaving rupiah-denominated government bonds. Moreover, the funds being used to finance the government bonds are coming from state-owned banks.

Disclaimer

This content is provided by Tenggara Strategics in collaboration with The Jakarta Post to serve the latest comprehensive and reliable analysis on Indonesia’s political and business landscape. Access the latest edition of Tenggara Backgrounder to read the articles listed below:

Politics

1. Tension between Jokowi and Megawati about to get worse
2. PDI-P targets Prabowo, Jokowi over ‘environmental crime’ of food estates
3. Jakarta breathes in crisis as govt scrambles to solve air pollution
4. Elections to influence upcoming TNI chief nomination                         

Business and Economy

1. Mandalika SEZ fails to deliver promised benefits to locals
2. Corporate interests suspected behind nationwide RTRW revision
3. Trade surplus decreases as imports surge due to low commodity prices

    

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