Prabowo Subianto's Economic Policies

Article by Luca Menghini

Indonesia's Path to Growth and Stability

Since October 20, 2024, Prabowo Subianto is the new president of Indonesia, following a highly contested election that brings both continuity and change. Building on the foundation laid by his predecessor, Joko Widodo, better known as Jokowi, Prabowo aims to boost Indonesia’s economic growth while introducing new strategies to address the long-standing structural challenges that have always characterized the country. His administration arrives at a crucial moment for Indonesia, which, as the largest economy in Southeast Asia, positions itself at the center of the global trade, especially given its wealth of natural resources.

Prabowo has emphasized that his commitment will be to continue many of Jokowi's policies, particularly concerning infrastructure development and resource management. Jokowi's administration saw Indonesia become a significant player in the electric vehicle supply chain, capitalizing on and leveraging its vast reserves of nickel, one of the key components used to manufacture EV batteries. Various foreign companies, including Hyundai and LG, have made significant investments in Indonesia, attracted by the opportunity to access these resources. Prabowo has promised to pay particular attention to developing the domestic downstream sector, which involves refining raw materials into high-value products. This is to ensure that Indonesia gains more benefits beyond the mere extraction of resources, allowing the country to better capitalize on the wealth present within its territory.

Prabowo's promises of continuity are reassuring for many people; however, compared to his predecessor, he faces an economy with new challenges. Under Jokowi, Indonesia experienced stable growth of around 5% per year. However, Prabowo has set an even more ambitious goal, aiming for growth of 8% during his presidency. Achieving this will not only require a continuous flow of investments in infrastructure but also reforms in other sectors, particularly in boosting the level of innovation and addressing the ongoing issue of informal employment in the country. Indonesia's economy, heavily reliant on exports of raw materials such as nickel and palm oil, needs to be diversified to ensure sustainable growth and avoid falling into what economists call the "middle-income trap." This is the point at which a country's economy begins to stagnate before reaching the status of a developed economy.

One of Prabowo's most ambitious plans is to significantly increase government spending, particularly on social programs such as free meals for school-aged children, one of his campaign promises. His administration is aiming to raise Indonesia's debt-to-GDP ratio from the current 39% to 50%, a move that is sparking a heated debate among economists and investors. While Prabowo's team argues that increasing the country's debt is necessary to provide the funds deemed essential for the various programs the government wants to implement, critics claim that such a move could destabilize Indonesia's long-standing fiscal discipline. Under Jokowi, Indonesia maintained conservative fiscal policies, with strict limits on budget deficits and debt issuance, which helped protect the economy from external shocks.

Prabowo's administration has reassured the markets by stating that the increase in borrowing will be accompanied by efforts to raise revenues. His team has proposed various measures to boost government income, including raising taxes and royalties from the mining sector, as well as enhancing the mechanisms for tax collection. However, the challenges are significant. The tax-to-GDP ratio remains low compared to other Southeast Asian nations, and many of the country's workers are employed informally, making it difficult to expand the tax base.

Energy and energy security are other key pillars of Prabowo's economic agenda. Indonesia is the largest producer of palm oil, and Prabowo is planning to expand its use in biofuel production, with the goal of reducing the country's dependence on diesel imports. Under the B35 policy introduced last year, a blend containing 35% palm oil is now legally required in biodiesel, and Prabowo has decided to increase this percentage to 50% by 2029. By reducing dependency on fuel imports, Prabowo hopes to improve the country’s trade balance and give a significant boost to domestic production. 

Regarding the issue of food security, Prabowo has emphasized the need for agricultural reforms to increase productivity and reduce Indonesia’s dependence on food imports. He has highlighted plans to invest in modernizing the agricultural sector, improving irrigation systems, and expanding access to credit for small-scale farmers. These measures aim to ensure that Indonesia meets the food needs of its population while also creating new opportunities in rural areas.

Prabowo's leadership will also be shaped by Indonesia's geopolitical position between the two global powers, the United States and China. Indonesia has maintained a neutral stance, carefully balancing its relations with both countries, and Prabowo is expected to continue this approach. China is Indonesia's largest trading partner, and economic ties between the two countries have strengthened in recent years, particularly in terms of infrastructure investments. At the same time, Indonesia remains a key partner of the United States in Southeast Asia, particularly in the security sector. Prabowo, a former general, is expected to continue developing Indonesia's defense capabilities while maintaining a neutral approach in the broader geopolitical competition between the United States and China.

Foreign investments will continue to play a key role in Prabowo's economic strategies. Under Jokowi, Indonesia saw significant growth in foreign direct investment (FDI), particularly in the mining and manufacturing sectors. Prabowo has indicated that he will maintain the incentives introduced under the previous administration to attract foreign investors, including tax breaks and streamlined regulations. However, the market reaction to Prabowo's economic policies has been mixed, with some investors concerned about the potential risks of increased borrowing. Recent downgrades by investment banks like Morgan Stanley reflect these concerns, although rating agencies such as Fitch and Moody's have maintained a stable outlook for Indonesia, citing the country's strong economic fundamentals.

Despite these challenges, Prabowo's presidency represents an opportunity for Indonesia to solidify its position as a regional economic leader. His administration is focused on industrial development, energy independence, and food security, which should lead to the goal of achieving long-term stability and growth. However, everything will depend on how effectively his government can balance the need for fiscal prudence with the demands of an ambitious economic agenda. Investors and international partners will be closely watching how Prabowo navigates these challenges in the early years of his presidency.

The inauguration of Prabowo's presidency marks the beginning of a new chapter for Indonesia. It is hoped that this chapter will be defined by efforts to accelerate growth while ensuring that its benefits are distributed equitably among the population. His ambitious targets, while challenging, signal a clear intention to transform Indonesia into a high-income country by 2045. If successful, his policies will not only lift millions of people out of poverty but also solidify Indonesia's role as a global economic power in the years to come.