JAKARTA: Senior economist and former finance minister Chatib Basri has pushed back against growing concerns about the country’s economic outlook, arguing that the “domestic situation is not as bad as people imagine”, despite mounting fiscal issues and external pressures.
“This is the question I am constantly asked: Is 2026 similar to 1998? My answer is no. The biggest difference between 1998 and 2026 is that Indonesia now operates under a flexible exchange rate regime,” he said on Monday. during the Grab Business Forum 2026 event in Jakarta.
Unlike the 1998 crisis when many firms held unhedged US dollar debts, businesses today were better prepared to manage currency volatility, said Chatib, dismissing fears that a weaker rupiah could trigger a recession.
“People can debate whether growth will be 5.6%, 5.1% or 4.7%. Whatever the number, it is not negative growth,” he emphasised, noting that a growth rate of 4.5% to 5% was still favourable compared with many economies facing global uncertainty.
He warned instead that the key issue facing the country was not economic fundamentals but confidence in fiscal management.
Chatib noted that Indonesia’s credit default swap (CDS) spread, a commonly used measure of sovereign risk, had been rising since January, well before the outbreak of the Iran war on Feb 28.
“So, if people say the war is to blame, that’s not true. Why? Because other countries have also been affected by the conflict, yet their currencies have not depreciated as much as Indonesia’s,” he said.
“The causality tests show that the biggest factor behind the rupiah’s weakness is fiscal risk.”
He estimated that 23% of the rupiah’s depreciation could be explained by movements in CDS spreads, indicating that investor confidence in the government’s fiscal position had become a significant issue.
This stemmed partly from the sustainability of government spending.
While fiscal stimulus helped support growth in the first quarter (1Q), when government expenditure expanded more than 20%, Chatib questioned if such a pace could be maintained without stronger tax revenue collection.
“Tax revenue, as we can see, is growing by around 18%, while government spending is expanding by 34%,” he said.
“As I mentioned earlier, there is a possibility that tax revenue growth will slow in the 3Q and 4Q.
“If that happens, government spending will inevitably have to slow as well. Otherwise, the budget deficit could exceed 3%. That is what is creating anxiety among investors.”
Amid market speculation that he could replace Finance Minister Purbaya Yudhi Sadewa, Chatib quipped that the Finance Ministry’s task was actually straightforward: “You only have three choices: raise revenue, cut spending or borrow.”
The former finance minister continued: “If you can’t raise revenue, then you have to cut spending. But in the current situation, increasing taxes is not an option.
“Borrowing more isn’t ideal. Financing costs have become increasingly expensive. That makes the third option the most likely one: selectively cutting spending.”
Despite the weaker currency, Chatib said inflation was relatively contained.
Based on Bank Indonesia estimates, the pass-through effect from rupiah depreciation to consumer prices remained modest. — The Jakarta Post /ANN
