JAKARTA: Indonesia is ready to adjust budget expenditure to keep its fiscal deficit below three per cent of GDP as the conflict in the Middle East threatens to drive up oil prices and pile more pressure on the economy, Finance Minister Purbaya Yudhi Sadewa said on Tuesday (March 3).
Even before the current crisis, the rupiah and the Indonesian stock index have been among Asia's worst performers in 2026, with the currency weakening more than one per cent against the US dollar and the Indonesian stock exchange shedding as much as 7.5 per cent, putting President Prabowo Subianto's ambitious economic goals in jeopardy.
The finance ministry has assessed that if the global oil price reaches up to around US$90 per barrel, it could widen Indonesia's budget deficit to around 3.6 per cent of GDP, Purbaya told Reuters in his first one-on-one interview with foreign media since he took office last year as a surprise replacement for the respected veteran Sri Mulyani Indrawati.
Sri Mulyani's conservative fiscal policies were long seen as a bulwark for the financial discipline that has underpinned investor confidence in the G20 economy since the Asian financial crisis.
Purbaya was seen as a pro-growth replacement appointed to achieve Prabowo's eight per cent GDP growth target, raising investor concerns about fiscal stability.
"Assuming the worst case, if the oil price goes as high as US$90 to US$92 per barrel, in those conditions, without adjusting our current budget, the deficit will increase to around 3.6 per cent of GDP," he said.
The 2026 budget assumed a domestic crude oil price of US$70 per barrel.
"Of course, we'll cut expenditure that creates the least impact to the economy," he said, adding that the ministry has already drawn up contingency plans.
Brent crude reached a 14-month high at US$82.37 per barrel in the wake of the air attacks against Iran, US$10 higher than Friday's close.
US crude hit an eight-month high of US$75.55 per barrel. A quarter of Indonesia's crude oil imports come from the Middle East, while the region also accounts for 30 per cent of the country's liquefied petroleum gas (LPG) imports, energy minister Bahlil Lahadalia said on Tuesday.
Free meal scheme could be scaled back
Purbaya said expenditure on Indonesia's free meals programme could be scaled back, saving the country about 100 trillion rupiah (US$6 billion).
The ambitious US$20 billion scheme, which seeks to provide daily nutritious meals to up to 83 million Indonesians, has been a major bone of contention for investors, raising concerns that it will undermine fiscal discipline in South-East Asia's largest economy.
In February, global rating agency Moody's cut Indonesia's credit rating outlook to negative from stable, also mentioning social programmes like free meals as one of the key concerns. Ratings agency Fitch also met Purbaya and other officials in Jakarta last week as it prepares its own review of the country.
"They (Fitch) are concerned about how Danantara affects our fiscal condition," he said, referring to Indonesia's new sovereign wealth fund.
"Their (Danantara's) debt is not affecting our debt, their project is not affecting our financing. If they fail, they can finance their failure with their dividend that they receive from their companies," he added.
Deficit fears are misplaced
Purbaya said he believed he will achieve Prabowo's eight per cent GDP growth goal while staying within the three per cent fiscal deficit ceiling, and fears about crossing the legal limit were misplaced.
"Growth is important. Fiscal sustainability is important. But the most important thing is to optimise the existing fiscal conditions in creating economic growth," he said.
The deficit would only narrow over the next two years, he said.
"I won't surpass that limit anytime soon or in the future." - Reuters
