(Bloomberg) -- Indonesian President Joko Widodo used his tenth and final budget to both secure his legacy and the support of incoming leader Prabowo Subianto, who inherits a healthy balance sheet with room for more spending.
Jokowi, as the leader is known, announced a target deficit of just 2.53% of gross domestic product in the 2025 budget, which is lower than the latest estimate of a 2.7% deficit for this year and well below the 3% legal cap. He reduced infrastructure spending, which has driven much of his growth and boosted funds for education and nutrition, policy priorities for Prabowo.
The budget came hours after Jokowi’s final State of the Nation address, where he spoke proudly of having cut poverty and achieved roughly 5% annual GDP growth, even as he apologized for not meeting everyone’s expectations. He highlighted Indonesia’s growing global clout both geopolitically and among investors, and the country’s efforts to refine and export higher-value-added products, not just raw materials.
“Jokowi’s tenure has been characterized by significant improvements in the country’s investment climate, and steady improvements in the country’s competitiveness” for foreign direct investment, said Douglas Ramage, managing director at BowerGroupAsia Indonesia, a strategic advisory firm.
Jokowi said he has built a foundation for “Indonesia-centric development” that includes boosting onshore processing of critical minerals which have drawn investments and created more than 200,000 jobs. Along with Brazil and India, other giants of the so-called Global South, Indonesia has become increasingly confident in world affairs during his time in office, which is ending due to term limits.
“Although many countries sue us, oppose us, and even attempt to thwart us, we as a sovereign nation, as a great nation, remain steadfast and even continue to march forward,” said Jokowi, who will step down from his post in late October after serving the maximum two five-year presidential terms.
Legacy Politics
Jokowi, who twice beat Prabowo in presidential elections, has sought to win the support of the former general, who campaigned on a welfare platform that includes a roughly $29 billion program to give free meals to children. Education and food security saw 9% jumps in their budgetary allocation for 2025.
In contrast, infrastructure spending declined by 6%. During his presidency, Jokowi had championed an aggressive buildout of airports, ports and rails, capped off with the ambitious $29-billion new capital city.
But Jokowi has raised concerns with his efforts to ensure his continued influence, especially after he allowed his 36-year-old son, Gibran Rakabuming Raka, to be Prabowo’s running mate. Their victory means that, for the first time in Indonesian history, the scion of a sitting president has become the vice-president elect.
That has disappointed many supporters of the soft-spoken former furniture-maker and Metallica lover, who came to power vowing to reform a system dominated by family dynasties and military elites. Activists have also accused Jokowi of eroding Indonesia’s democracy, including through a criminal code that some say could stifle free speech and dissent.
“Ten years is not a long period to solve all problems in our nation,” Jokowi told lawmakers on Friday. “I would like to extend our apology — apology for anyone who feels disappointed, for every hope that has not been materialized, for every dream that has not been realized.”
Prabowo’s Inheritance
Jokowi failed to achieve the 7% GDP growth goal he set when he took office in 2014, not least because of external challenges like the global pandemic. He forecast 5.2% growth next year. Prabowo aims for even faster growth of 8%.
Still, the incoming leadership team was forced to commit to the existing deficit cap after financial markets were spooked by talk that it could try and boost growth by spending more.
The 2025 deficit target “actually gave me some confidence in the country trying to exercise continued prudence,” said Jerry Goh, investment director of Asian equities at abrdn. “There is an understanding. That probably could make the market not as jittery.”
Still, Prabowo could potentially legislate to revise next year’s spending plan.
“The 2025 budget assumption is broadly in line with what was previously detailed in July,” said Wee Khoon Chong, a senior Asia Pacific markets strategist at BNY Mellon in Hong Kong. “We do not think this could fully address near-term investors’ concerns on the new administration’s fiscal strategy. Budgets do change and Indonesia is no exception.”
The rupiah closed little changed at 15,690 per dollar after erasing an earlier loss. The yield on benchmark 10-year bonds held an earlier 1 basis point decline at 6.72%. The benchmark stock index was up 0.3% and remains near its all-time high.
Indonesia is set to increase state spending to 3,613 trillion rupiah ($230 billion) next year, with a budget deficit of roughly 616 trillion rupiah.
As global conditions are “relatively stagnant, economic growth will rely more on domestic demand,” Jokowi said. “People’s purchasing power will be tightly maintained through controlled inflation, job creation, and support for social assistance and subsidy programs.”
--With assistance from Chandra Asmara, Norman Harsono, Eko Listiyorini, Soraya Permatasari, Matthew Burgess, Claire Jiao, Tassia Sipahutar and Clarissa Batino.
(Rewrites throughout with comment, details, context.)
©2024 Bloomberg L.P.
