Indonesia's Fiscal Discipline Under Pressure Amid Rising Oil Prices

President Prabowo Subianto has expressed a commitment to maintaining Indonesia's statutory budget deficit cap of 3% of gross domestic product (GDP), stating that any breach would only be considered in emergency situations. In an interview with Bloomberg News, Prabowo emphasized the importance of fiscal discipline, asserting that Indonesia must "live within our means." He referenced the Covid-19 pandemic as a precedent for temporarily exceeding the deficit cap, which has been in place since the early 2000s following the Asian financial crisis.

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Prabowo's administration is currently facing significant economic challenges, including rising oil prices due to the ongoing conflict in the Middle East. Finance Minister Purbaya Yudhi Sadewa warned that if crude prices average $92 per barrel this year, the budget shortfall could widen to 3.6% of GDP. The current budget assumes an average oil price of $70, and the government is under pressure to manage rising costs without increasing fuel prices, especially ahead of the Eid al-Fitr holiday, a peak travel period in Indonesia.

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To stimulate economic growth, Prabowo's government plans to invest in low-cost housing, village cooperatives, and a free meals program for over 80 million people. However, the reliance on imported fuel has complicated these efforts, as Indonesia's currency has weakened and the import bill has increased. Prabowo has stated that raising subsidized fuel prices is not an option, particularly during the Eid holiday, despite acknowledging that maintaining this stance could be "very difficult" if oil prices exceed $120 per barrel.

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The president has also indicated a shift towards renewable energy, aiming to eliminate costly fuel subsidies within three years and replace them with 100 gigawatts of solar power. He believes that Indonesia's natural resources, including palm oil and coal, can support the nation's energy needs and economic stability.

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The uncertainty surrounding Indonesia's fiscal policies has led to market turmoil, with the Jakarta Composite Index dropping significantly and government bond yields rising. Analysts have expressed concerns that the government may struggle to maintain the 3% deficit cap, especially as rising oil prices threaten to inflate subsidy costs. John Foo, founder of Valverde Investment Partners, noted that the administration faces a difficult choice between increasing the deficit or cutting back on growth.

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Critics have pointed out that the government's assurances of fuel security have not been accompanied by concrete solutions, raising fears of inflation and further economic strain. Bhima Yudhistira Adhinegara from the Center of Economic and Law Studies highlighted the risks of the government's approach, particularly as consumption typically rises during the Eid holiday.

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Prabowo has reiterated his commitment to fiscal discipline, stating, “Do not spend more than you earn. This is the basics of life to survive.” He has also called for measures to cut costs and fuel consumption, although specific plans have yet to be detailed. The government remains focused on curbing fuel consumption and exploring alternative energy sources to mitigate the impact of rising oil prices.

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There are discrepancies regarding the potential for Indonesia to exceed its budget deficit cap. While Prabowo has stated that any breach would be temporary and only in emergencies, analysts warn that the current economic climate may force the government to reconsider its fiscal policies. The lack of clear contingency plans has left many citizens and investors uncertain about the government's next steps.

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• “I don’t believe in deficits, actually. Maybe I’m old-fashioned.” — Prabowo Subianto, President of Indonesia

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• “If we weather this, in two years we will be very efficient,” — Prabowo Subianto, President of Indonesia

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• “The government is asking the public to remain calm without presenting concrete solutions,” — Bhima Yudhistira Adhinegara, Executive Director, Center of Economic and Law Studies

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• “Prices will have to be increased in Indonesia, especially if the government also wants to pursue other projects with its budget,” — Trinh Nguyen, Senior Economist, Natixis SA

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