Indonesia lowers 2025 GDP growth forecast, keeps budget gap plan

JAKARTA (Reuters): Indonesia's government expects economic growth in 2025 to be within a range of 5.1% to 5.5%, Finance Minister Sri Mulyani Indrawati told parliament on Monday, which is slightly below a previous forecast range of 5.3% to 5.6%

The growth outlook, along with predictions on bond yields and rupiah exchange rate, were discussed as the basis of the government's 2025 budget.

Outgoing President Joko Widodo will firm up the figures and present the 2025 budget to parliament in mid-August and lawmakers are expected to debate the plans the month after, even though his successor Prabowo Subianto will take over in October.

Officials have said president-elect Prabowo's transition team is working with the finance ministry so that the 2025 budget will reflect his plans after taking office.

Sri Mulyani said new initiatives on nutrition improvement for school children, Prabowo's flagship programme, will be part of the 2025 fiscal plans, but did not offer details.

Some analysts have warned about the high cost of Prabowo's signature campaign pledge to give free meals to 83 million children, saying it could undermine Indonesia's track record of fiscal discipline.

His team had estimated in February it could cost $7.7 billion in its first year. Prabowo's camp says it could spur growth by as much as 2.6 percentage points when fully implemented by 2029.

Despite the downgrade in the economic growth outlook, the government will design next year's budget with a deficit plan of between 2.45% and 2.82% of GDP, close to the previously given range of 2.48% to 2.80% of GDP.

In comparison, this year's budget deficit plan is 2.29% of GDP and the previous year's deficit was 1.65% of GDP.

The public debt-to-GDP ratio will be kept within a range of 37.98% to 38.71% next year, Sri Mulyani said, roughly around where it was by the end of the first quarter.

The outgoing finance minister underlined the importance of managing healthy fiscal metrics, especially as Indonesia relies more on market-based financing, instead of bilateral or multilateral loans, to plug its budget gap.

"A significant widening of the fiscal deficit has the potential to increase bond yields, pressure the rupiah exchange rate, raise domestic interest rates and in turn, this will reduce the private sector activity, which is often described as the crowding out effect," she said.

(Reporting by Gayatri Suroyo; Editing by Martin Petty and Krishna Chandra Eluri) - Reuters