Indonesia braces for wider deficit and swelling debt in 2025 budget plan

[JAKARTA] Indonesia is set to face a larger budget deficit and a higher debt next year due to high interest rates and a weakened currency, said Finance Minister Sri Mulyani Indrawati.

Sri Mulyani, who is widely expected not to join President-elect Prabowo Subianto’s administration, has proposed expanding the deficit to between 2.45 per cent and 2.82 per cent of GDP – still below the 3 per cent ceiling – to help the new government finance its campaign programmes.

Additionally, the debt-to-GDP ratio is projected to increase to a range of 39.8 per cent to 40.1 per cent, compared to this year’s target of just under 38.3 per cent.

“If interest rates persist at elevated levels for an extended duration and the exchange rate encounters pressure, it will inevitably affect expenditures, notably debt interest payments,” she said at a parliamentary meeting on Thursday (June 6).

The Indonesian government is finalising the macro assumptions for the draft budget for the 2025 fiscal year, with lawmakers scheduled to debate it before its anticipated passage into law in September, one month before Prabowo’s inauguration.

The growth outlook, along with predictions on bond yields and rupiah exchange rate, were discussed as the basis of the 2025 budget.

Sri Mulyani said that the free lunch programme for school children, a cornerstone of Prabowo’s election campaign, will be part of the new fiscal plan, though she did not provide further details.

However, some analysts have raised concerns as the scheme is expected to cost around 468.9 trillion rupiah (US$30 billion) annually, which is a significant portion of Indonesia’s total budget.

According to data from the Finance Ministry, Indonesia will see an increase of government debt maturing reaching about 802 trillion rupiah in 2025 as a tail effect of escalating bond issuance during the Covid-19 pandemic.

Despite the rising risks, Sri Mulyani emphasised the importance of maintaining prudent fiscal policy in the country’s budget.

This fiscal discipline will serve as Sri Mulyani’s effort to uphold investors’ trust in the largest economy in South-east Asia, especially as they are offloading emerging-market (EM) assets.

The outbreak of conflict between Israel and militant group Hamas is the latest in a long list of concerns that has investors ditching EM assets for the safety of the US dollar.

Edi Susianto, the head of the monetary department at Bank Indonesia, told The Business Times of the bank’s commitment to more assertively intervene in the market to bolster investor confidence amid the rupiah’s decline to its lowest level since April 2020.

On Thursday, the rupiah traded at around 16,285 against the US dollar, following a decline of as much as 0.5 per cent to 16,293 per dollar the day before, marking its lowest level since April 2020.

Throughout the year, the rupiah has weakened by more than 5 per cent, prompting an unexpected interest-rate hike by Bank Indonesia in April to mitigate further depreciation of the currency.

As Indonesia anticipates modest export growth, the government expects economic growth in 2025 to fall within a range of 5.1 per cent to 5.5 per cent – lower than the previous forecast range of 5.3 per cent to 5.6 per cent.

Similar to other export-dependent countries, Indonesia’s economic growth has slowed this year due to a global decline in demand for goods particularly on commodities such as palm oil and coal.