Indonesia’s Economic Challenges Under Prabowo: Uncertainty and Reform in Focus

Indonesia, South East Asia’s largest economy, is grappling with a complex set of economic challenges under the leadership of President Prabowo Subianto, who has been in office for just over four months. Amid a strengthening US dollar, high costs of bond issuance, and a limited ability to lower interest rates, the government is pushing for ambitious growth targets while relying on budget cuts to fund flagship initiatives like the free nutritious meal programme and the new sovereign wealth fund, Danantara. However, economists and market analysts have raised concerns over policy “confusion” and “uncertainty,” which they argue are contributing to a declining stock market and a weakening rupiah.

Speaking at The Jakarta Post’s inaugural Privé Series event on Thursday, a panel of economic experts painted a sobering picture of Indonesia’s fiscal and monetary constraints. With President Prabowo targeting an ambitious 8 per cent GDP growth by 2029, the path forward appears fraught with obstacles, leaving structural reform as the most viable option to achieve sustainable progress.

Fiscal Tightrope: Budget Cuts and Policy Dilemmas

One of the central challenges facing Indonesia is the limited room for fiscal and monetary manoeuvre. Former Finance Minister Chatib Basri, now a member of the revived National Economic Council (DEN), highlighted during the event that Bank Indonesia (BI) has little scope to lower its benchmark interest rate—a key tool for spurring growth—unless the US Federal Reserve follows suit. Given inflationary pressures in the US, exacerbated by policies such as import tariff hikes, such a move appears unlikely in the near term.

Expanding fiscal policy is equally challenging. High market interest rates for government bonds, coupled with an already significant budget deficit, restrict the government’s ability to borrow further. “We need to address the issue of regulatory certainty and remove bureaucratic hurdles. The government is doing it right now,” Basri remarked, pointing to structural reforms as the only feasible path to achieving growth targets.

Basri expressed cautious support for Prabowo’s budget cuts, which are intended to redirect funds to priority areas. However, he advocated for a targeted approach based on audits to identify inefficient projects. Citing the example of Kertajati Airport in West Java, he questioned its effectiveness and suggested that similar underperforming initiatives should be reviewed. “There are many projects like this that the government needs to review,” he said, underscoring the need for efficiency in public spending.

Tax administration was flagged as another area ripe for reform. Basri noted that many businesses deliberately keep their revenue below Rp 4.8 billion (approximately US$291,842) to qualify for a preferential 0.5 per cent tax rate. While lowering this threshold could increase revenue, he acknowledged that such a move would likely face public backlash. “This is not going to be popular, as some people will go against this,” he admitted.

Bureaucratic Expansion and Policy Confusion

The expansion of Indonesia’s bureaucracy under Prabowo’s administration has added to fiscal pressures and muddled decision-making, according to Yose Rizal Damuri, executive director of the Centre for Strategic and International Studies (CSIS). Speaking at the same event, Damuri echoed the call for efficiency through spending cuts but cautioned that there are no clear criteria for determining which parts of the budget should be trimmed.

He pointed to a paradox at the heart of current governance: while new ministries and programmes have been introduced, increasing costs, there is a lack of clarity in policy direction. “This paradox creates more confusion, both within the government and across the economy. It also makes it harder for the market to respond,” Damuri warned. He suggested that such uncertainty could undermine the administration’s broader objectives, including its growth targets.

Damuri also criticised delays in key planning processes, noting that the 2025–2029 National Medium-Term Development Plan (RPJMN) took four months to publish, rather than the typical two. He attributed part of this inefficiency to blurred lines of authority between politicians and technocrats, a departure from the traditionally clearer division of roles. “We’ve seen several instances where [the legislature] has had more sway over economic policy. Meanwhile, the technocratic side itself has yet to develop [a stronger influence],” he observed.

Market Pessimism: Stocks and Rupiah Under Pressure

The economic uncertainty described by Basri and Damuri is already manifesting in Indonesia’s financial markets. Satria Sambijantoro, head of equity research at Bahana Sekuritas, a local brokerage, highlighted the underperformance of the Indonesian stock market compared to other emerging markets. “Do you know how Indonesia’s stock market performed last year? It was down 13 per cent, while our peers were up around 18 per cent,” he said at the Privé Series event. He noted that since October, even major blue-chip stocks like Bank Mandiri have seen significant declines, with share prices plunging by 40 per cent.

Local companies are also showing signs of a slowdown. The banking sector, once a powerhouse with annual net profit growth of up to 20 per cent, is now projected to grow by just 6 per cent this year. The rupiah, meanwhile, remains weak compared to regional currencies such as the Chinese yuan, Japanese yen, and Malaysian ringgit over the past fortnight, further reflecting investor pessimism.

While Sambijantoro acknowledged that Prabowo is still early in his tenure and navigating a “learning curve,” he stressed that markets and analysts are focused on tangible results. “From an ambitious standpoint, analysts and investors are looking at the hard numbers,” he said. The sentiment echoes Basri’s earlier quip during his keynote address, where he suggested that every leader eventually becomes “a normal president” after the initial year in office. “You can say anything during a campaign, but once you’re in power, then you become a normal president. We’ll see [how it plays out],” Basri remarked, drawing a parallel to global leaders facing similar constraints.

Sovereign Wealth Fund and Private Investment Concerns

The establishment of Danantara, Indonesia’s new sovereign wealth fund, has been positioned as a cornerstone of Prabowo’s economic vision. Intended to drive infrastructure development and attract foreign investment, the fund is one of several flagship initiatives funded partly through budget cuts. However, concerns have been raised about its potential impact on private investment.

Some analysts worry that Danantara could crowd out private sector participation if not managed transparently. While the fund’s objectives are ambitious, its success may hinge on the government’s ability to provide regulatory certainty and foster investor confidence—areas already identified as weak points. If mishandled, the initiative could exacerbate the very economic uncertainty that experts like Damuri have cautioned against.

Structural Reform as the Way Forward

Amid these challenges, structural reform emerges as the consensus solution among Indonesia’s economic thinkers. Beyond tax administration and bureaucratic efficiency, there is a broader need to streamline regulations and create a more predictable business environment. Such measures could help reverse negative market sentiment and stabilise the rupiah, while laying the groundwork for sustainable growth.

However, implementing reforms is easier said than done. Public resistance to unpopular measures, such as lowering tax thresholds, combined with the complexities of coordinating a sprawling bureaucracy, poses significant hurdles. Moreover, the global economic environment—characterised by a strong US dollar and inflationary pressures—limits Indonesia’s policy options, forcing the government to focus on domestic levers of change.

President Prabowo’s first 100 days have been marked by bold promises, including the 8 per cent GDP growth target by 2029. Yet, as Basri, Damuri, and Sambijantoro have noted, translating ambition into results will require clarity, discipline, and a willingness to prioritise long-term stability over short-term populism. The coming months will be critical in determining whether the administration can overcome early perceptions of confusion and build a coherent economic strategy.

A Learning Curve for Leadership

Indonesia’s economic challenges are not unique, but they are compounded by domestic policy uncertainties and global headwinds. As Prabowo navigates his early tenure, the balance between ambitious targets and pragmatic governance will be key. While budget cuts and structural reforms offer a potential path forward, their success depends on execution and the government’s ability to restore confidence among investors and the public alike.

For now, the mood in Jakarta remains cautious. Markets are watching closely, and economists are calling for greater transparency and efficiency. As Basri wryly noted, the realities of governance often temper campaign promises. Whether Prabowo can defy this trend and deliver on his vision remains to be seen, but the stakes for Indonesia’s economy—and its people—are undeniably high.