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Indonesia Aims for 8% Growth Under President-elect Prabowo Subianto

Prabowo targets 8% growth for Indonesia, focusing on industrialization and fiscal discipline amid external financial challenges.

By Athena Xu

5/15, 04:20 EDT

Key Takeaway

  • President-elect Prabowo Subianto targets an ambitious 8% growth for Indonesia, aiming to surpass India as the world's fastest-growing major economy.
  • Plans include boosting tax revenue to 14%-16% of GDP and maintaining fiscal discipline while funding significant initiatives like free lunches for students.
  • Fitch Ratings expresses concerns over the proposed new state revenue agency and stagnant FDI inflows, highlighting challenges in achieving these growth targets.

Ambitious Growth Targets

President-elect Prabowo Subianto has outlined a bold vision for Indonesia's economy, aiming to achieve an 8% growth rate and potentially surpass it within the first two to three years of his term. This target is set to position Indonesia as the world's fastest-growing major economy, overtaking India. Prabowo's strategy focuses on industrialization with a significant emphasis on food and energy security. He plans to drive growth through the production of diesel from palm oil, which could lead to substantial savings by reducing the $20 billion worth of diesel currently imported. Additionally, agriculture is highlighted as a key sector for propelling economic expansion.

Fiscal Strategy and Spending Plans

Prabowo intends to bolster Indonesia's fiscal health by increasing tax revenue to 14%-16% of GDP, aiming to fund ambitious spending promises while adhering to fiscal discipline. The government is legally mandated to keep the budget deficit below 3% of GDP, a limit Prabowo has committed to maintaining. Among his notable spending plans is a program to provide free lunches and milk to over 80 million students, estimated to cost up to 460 trillion rupiah ($28.7 billion) annually. This initiative is expected to create employment opportunities for women and small businesses, despite its significant impact on the budget deficit.

Tax Reform and Revenue Collection Concerns

Fitch Ratings has raised concerns regarding Prabowo's proposal to establish a new state revenue agency separate from the finance ministry. Thomas Rookmaaker, Fitch Ratings’ head of Asia-Pacific Sovereigns, warned that this move could disrupt long-term revenue collection and introduce operational uncertainties. Fitch forecasts a decline in state revenue to 14.6% of GDP, the lowest among peers, which could challenge efforts to improve Indonesia's credit rating. The agency suggests that removing tax exemptions and raising compliance would be more effective strategies for boosting revenue.

External Financial Outlook and Challenges

The president-elect's plans come amid warnings from Fitch Ratings about potential challenges to Indonesia's external finances, particularly as commodity prices normalize and the current-account deficit likely deteriorates. Despite efforts to attract foreign direct investments (FDIs) through initiatives like establishing nickel smelters and battery assembly plants, FDI inflows have remained stagnant compared to pre-pandemic levels. This indicates that the anticipated benefits of shifting supply chains have yet to be realized, posing additional challenges to achieving the ambitious economic growth targets.

Management Quotes

  • Prabowo Subianto, President-elect of Indonesia:

    "I am very confident" of achieving 8% growth and "determined to go beyond." "We want to produce our diesel from palm oil. This will be a very strong growth driver." "What would be the growth drivers in the first few years would be our concentration on agriculture," food production and energy self-sufficiency.