Indonesia Debt Challenges Under Prabowo Leadership

Indonesia faces significant debt challenges as President-elect Prabowo Subianto prepares to take office. State-owned enterprises (SOEs) carry $186 billion in debt. This is a legacy of aggressive infrastructure spending by his predecessor. Prabowo must stabilize these firms while navigating limited fiscal capacity. The government has only $70 billion available after debt servicing and fund transfers, leaving little room for maneuvering.

Prabowo’s administration appears poised to continue relying on SOEs to drive economic programs, despite the financial strain. Construction giants PT Waskita Karya and PT Wijaya Karya amassed over $9 billion in liabilities. These debts were accumulated under former President Joko Widodo. The financial strain led to recent restructurings for both companies.

Investor confidence in SOEs has eroded significantly. This is evident from widening bond spreads. It is also reflected in the decline of rupiah-denominated bond issuance by state firms, dropping from over 50% in 2019 to 25% this year.

Prabowo should be aware that this deterioration could further limit SOEs’ ability to secure funds from public markets. As a result, these companies may increasingly rely on state-owned banks. Such dependency risks crowding out private sector financing.

At the same time, Indonesia’s foreign debt rose to $427.8 billion in the third quarter, driven by rupiah depreciation and public sector borrowing. While the debt-to-GDP ratio remains at a manageable 31.1%, Prabowo’s goal of achieving world-leading 8% economic growth depends heavily on strategic public spending.

Prabowo has hinted at raising the debt-to-GDP ratio to 50%. He plans to do this alongside boosting tax revenues. Measures include excise taxes and royalties. Critics worry this approach could unsettle capital markets. However, Prabowo’s team insists they will adhere to fiscal rules. These rules cap deficits at 3% of GDP and debt at 60%. The government has clarified its campaign promises. One example is the $4.3 billion annual budget for free school meals. This signals a commitment to prudent spending.

The administration must now balance ambitious economic targets with fiscal discipline, ensuring increased debt serves productive investments. How Prabowo addresses these intertwined challenges will define his economic legacy.