Indonesia's President Prabowo Subianto. — AFP
THE global economic landscape has been turbulent even before Prabowo Subianto was inaugurated as the eighth Indonesian president in October last year.
The world economy has been destabilised by geopolitical tension, deglobalisation, pandemic scarring and climate change risk.
The rules-based world order has been partly ignored and dismantled, and the increase of trade weaponisation has fractured the global supply chain, especially after United States President Donald Trump imposed unilateral sweeping tariffs on the United States trade partners.
This is the world economic landscape that Prabowo has to deal with as his presidency enters the second year.
Domestically, a challenging landscape has unfolded, marked by shift in governance and policy making, persistent low tax revenue and surging government debt.
Employment conditions have worsened, evidenced by increasing layoffs, stagnant wages, decline in job quality and expansion of informal employment. This was the result of underinvestment after the pandemic where investment was at 29% of gross domestic product (GDP), below 32% GDP before the pandemic.
Creating more jobs in manufacturing will face formidable challenges, as manufacturing is becoming more capital intensive.
Between 2014 and 2019, every 1% growth in manufacturing GDP created 157,000 new jobs, compared with 45,500 jobs created over 2019 to 2024. And with the advent of automation, digital platforms and artificial intelligence, the space for creating more jobs is shrinking.
Prabowo’s populist, project-driven, fiscally expansionary approach has been unfolding in a fragile institutional setting, putting pressure on Indonesia’s long standing foundational pillars of economic resilience, fiscal discipline, central bank independence, private sector dynamism and a vibrant middle class.
With fiscal health deteriorating and with Bank Indonesia (BI) monetary policy stuck with protecting the value of the rupiah and dealing with the volatile capital flows, the only alternative to higher growth is through higher investment and productivity.
In this regard, Prabowo’s government has limited choices: pushing growth through expansionary fiscal policies with inflationary risk, or through deeper structural economic reforms that can produce long term resilient growth.
His 2026 budget would depend on the achievement of the ambitious 13.5% increase in tax revenue. And as raising tax rates have been ruled out, it is unlikely that this target will be achieved.
As tax revenue shortfalls looms large this year and in 2026, Prabowo has several alternatives to choose from.
First is slowing the pace of his populist priority projects to keep fiscal stance on the discipline and prudent path.
Second, if Prabowo insists his signature programmes be implemented as scheduled, he has to increase debt and fiscal deficits, bringing them closer to the legal limit of 60% and 3% of gross domestic products respectively. Prabowo himself seems to be sceptical of the three over 60% legal caps. Last year in a business forum, he said that the caps on budget deficits and on government debt were “arbitrary”.
Actually these three over 60% caps were put in the 1992 Maastrich Agreement that established the European Union which paved the way to creation of the euro.
Monetising government debt by the central bank through BI purchase of government bonds is the third alternative.
But this alternative would erode BI’s independence and credibility which in turn would erode investor confidence. Especially when the arrangement is open ended that perpetuated fiscal dependency on BI financing.
The fourth alternative is asking support from Danantara for financing government projects. With Danantara’s huge financial resources this scheme is feasible, although this would raise concern on its transparency and accountability.
The country is also facing a fragile investor confidence who view Indonesia as a riskier place to invest compared with its peers.
Problems in implementing structural reforms, weak governance in a bloated cabinet and persistently high level of corruption have shaped investor perception on Indonesian risk. The repercussions are negative.
Despite decades of prudent fiscal and monetary policies, the fragility of investor’s confidence is reflected in some areas.
Yields on Indonesia’s government bonds are consistently higher than the yields of similar bonds on its peers.
Foreign direct investment flows relative to its gross domestic products are also lower. Investors here are still jittery, triggering capital outflows at the slightest sign of shocks, pushing down the rupiah exchange rate. They still view the risk of investing in Indonesia as relatively high. The premium on Indonesia’s credit default swap rose to 83.18 basis points, the highest since May.
Investor confidence should be restored because it is the key to attracting investors to invest. Accelerating growth to 8% needs a more modern, higher level of manufacturing.
Indonesia’s manufacturing has been dominated by resource oriented industries with low added value and is vulnerable to volatile commodity prices.
Manufacturing should be able to graduate from resource-based industries to down streaming industries and to high tech-driven industries. But it needs a focused, coherent long term strategy, instead of piecemeal policies.
Prabowo still has time to rejuvenate Indonesia’s manufacturing sector. It should be able to move up to advance tech-based industries and be able to produce and export electronics, semiconductor and telecommunication.
Indonesia is struggling to attract high-tech industries amid fierce competition from other Asean countries, especially Malaysia, Thailand, Singapore and Vietnam. It lacks a coherent strategy for developing advanced facilities particularly in semiconductor manufacturing.
In Malaysia, the global semiconductor supply chain contributed 25% of GDP, with major investments like Intel and Nvidia.
Apple has 28 factories in Vietnam and Singapore holds 11% in the high tech global markets.
Various factors have pushed Indonesia’s economy toward natural resource exports and low value manufacturing and low skill assembly. — The Jakarta Post/ANN
Winarno Zain is an economist and commissioner of a publicly listed company. The views expressed here are the writer’s own.
