Next Indonesia Leader Signals Restraint With Spending Deal

(Bloomberg) -- Indonesia President-elect Prabowo Subianto has agreed with the outgoing administration to allocate 71 trillion rupiah ($4.3 billion) for his free meal program for school children, a move that won’t blow the budget deficit cap and seeks to allay market concerns of expansionary spending.

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The budget proposed by the current government for the program will ensure the budget deficit remains below the mandatory 3% cap, according to Thomas Djiwandono, a member of the president-elect’s economic transition team. The program — a signature policy promised by Prabowo when he becomes president in October — will be carried out in stages.

“We want to emphasize that the President-elect is committed to the deficit target that will be agreed upon by the current government and the parliament,” Djiwandono said at a press briefing on Monday. Prabowo’s team seeks to implement the budget under the principle of quality spending and “to be able to achieve a 100% full scale program as soon as possible,” he added.

Indonesian bonds advanced and the rupiah gained, signaling that markets are finding some assurance that Indonesia will retain a prudent fiscal policy under Prabowo. There were initial concerns that his campaign pledges and other welfare plans could cost as much as 460 trillion rupiah a year, more than the entire 2023 budget deficit.

Bloomberg News reported earlier in June that Prabowo had planned to raise the debt-to-gross domestic product ratio to 50% by the end of his first term from the current 39% in order to fund his spending promises. The rupiah and Indonesian bonds tumbled and Prabowo’s economic transition team denied the report, saying it was not a formal position. Djiwandono again refuted the plan at Monday’s briefing.

Barclays Plc analysts have said any move to take government debt to 50% of GDP will require budget deficits to rise to 4%-6%, which breaches the mandatory limit. It is unclear whether Prabowo will even have the support in parliament to change the laws, the analysts said in a note.

Taking debt to 50% of GDP is not a new proposal as the former special forces general had raised this idea at one of his presidential debates. Prabowo, who has a reputation for flashes of temper during his speeches and being unpredictable, has also talked about the need to be daring with spending.

But by finally coming to an agreement to fund his campaign pledge without blowing the deficit limit, Prabowo, seems to be settling into the well-worn route of Indonesian presidents who try to balance populism with fiscal discipline.

“His transition team sees the need to clear up the current noises and provide more clarity, by formulating a more market reassuring fiscal strategy after receiving negative feedback from the markets,” said Jeffrosenberg Chen Lim, head of equity research at PT Maybank Sekuritas Indonesia.

There is much at stake for Indonesia. The economy is forecast to grow 5% this year as it benefits from increased public consumption and investment but it faces challenges from worsening trade conditions, the World Bank said in a biannual report issued Monday. Prabowo’s social programs should boost human capital and private consumption, the multilateral lender said.

While both the incoming and outgoing administrations agreed on the funding for the free meal program, it will need parliamentary approval, Djiwandono said.

Finance Minister Sri Mulyani Indrawati said at the same press briefing that funding for the free meal program has been included into the deficit range proposed for the draft 2025 budget. Indonesia’s 2024 budget deficit was on track to stay below 3% of GDP, she said.

There will be no gaps between the budget drafted for next year and the priority programs that will be implemented by the incoming government, Indrawati said.

Her comments were echoed by former finance minister Chatib Basri, who said the development suggests both the current and incoming governments will maintain fiscal discipline.

“In an uncertain global economic environment, with interest rates in the United States anticipated to remain high for the next year, it is critical to explain how fiscal discipline will be maintained,” he said.

--With assistance from Marcus Wong, Norman Harsono and Harry Suhartono.

(Updates with details throughout.)

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