Driving commercial and political engagement between Asia, the Middle East and Europe
Driving commercial and political engagement between Asia, the Middle East and Europe
Driving commercial and political engagement between Asia, the Middle East and Europe
By Sandra Sahelangi, Indonesia advisor
Indonesia’s new President, Prabowo Subianto, has unveiled his new cabinet which includes key figures from the former government’s economics team. In a move widely seen to ensure a seamless transition and to placate concerns among international investors, Sri Mulyani Indrawati – who served under President Jokowi and is highly regarded for keeping a tight rein on spending – has been reappointed Finance Minister. Shinta Kamdani, Chairperson of Indonesia Employers Association (APINDO), a well-established industry trade group, told Asia House that “the market trusts [Sri Mulyani’s] solid track record with proven results.”
Other ministers from the previous administration who have been reappointed include:
Other vice ministers remaining from the previous administration include Thomas Djiwandono and Suahasil Nazara, both Vice Ministers of Finance. Luhut Pandjaitan, a close ally of Jokowi who served as Coordinating Maritime Affairs and Investment Minister, has been appointed to lead the National Economic Council. Many of these ministers are well known to the international business community and Prabowo’s move to pick incumbents to lead strategic ministerial posts has been well received. Kamdani said she has “high hopes” of Prabowo and his economic team in continuing the pro-investment and pro-business policies from the Jokowi era.
Lucky Number 8
Prabowo’s favourite number 8 came from his call sign 08, as he has been referred to in his military circles for the last 40 years. He is Indonesia’s 8th president and has pledged that Indonesia will achieve an 8 per cent economic growth rate in three years by being “more daring” with government spending, including running a potentially larger deficit. Kamdani said that this target growth rate, while not impossible, will require a three-prong approach: a significant increase in tax revenues; significantly larger Foreign Direct Investment (FDI), and targeted programmes to strengthen middle class such as urban public transport and government-subsidised job training.
Financing Prabowo’s spending programmes
President Prabowo is inheriting a relatively stable economy from Jokowi. A steady pace of 5 per cent growth over the last decade, inflation rates in check (1.84 per cent in September 2024), a stable exchange rate, investment grade credit ratings, and significant infrastructure build-ups throughout the sprawling archipelago, is the starting position for the new Prabowo government.
Prabowo has ambitious spending plans, including a free meals programme for school children budgeted to cost US$4.6 billion. International investors will be looking at how he will finance these plans.
Prabowo is not opposed to an expansion of the tax base. He has repeatedly stated that he plans to increase the current tax-to-GDP ratio from 10 per cent to around 16 per cent, and for the most part this is to be done by hunting for more taxpayers. Compared with other countries, the current figure is significantly lower than the Asia-Pacific average of 19.3 per cent and OECD average of 34 per cent. However, the government may have to increase debt to finance the programmes.
Current debt levels are at 39.4 per cent of GDP, comfortably below the statutory maximum limit of 60 per cent of GDP. Hashim Djojohadikusumo, Prabowo’s brother and a key advisor, has floated the possibility of raising the debt-to-GDP ratio from its current level to 50 per cent. This proposed increase would still be permissible under the statutory maximum limit but would likely be viewed negatively by the business community. While Hashim’s statement triggered concerns, the subsequent reappointment of Sri Mulyani as Finance Minister has calmed nerves given her prudent approach to fiscal policy and her reputation for fiscal discipline.
The power play: Prabowo’s large cabinet and the balancing act of political alliances
The praise won by Prabowo for his choice of an experienced economics team has been tempered by concerns about the bloated number of ministers in the cabinet. In fact, this cabinet has the largest number of members since 1966, when Soekarno was first Indonesian President.
After winning 58 per of the electorate last February, Prabowo used the eight-month waiting period as President-elect to build a large coalition of political parties, even accommodating parties that supported his rivals. It seems that Prabowo took Jokowi’s playbook of embracing former rivals to the next level. Most political parties with parliamentary seats are represented in the cabinet, with 48 ministries representing various political parties, including the 16 carryover ministers from Jokowi’s cabinet. The relatively large number of carryovers does not necessarily mean Jokowi’s influence will continue. Ministers serve at the pleasure of the president, and Prabowo will want to cement his own legacy, instructing his cabinet ministers to execute his vision and agenda.
Kamdani said that the business community in general hopes that “the larger number of ministries would be balanced with them each being more focused and efficient, and them together being more coordinated. Clear division of responsibilities can boost synergy between ministries, and that in turn can accelerate economic development.” A report on World Competitiveness Ranking by Switzerland’s International Institute for Management Development ranked Indonesia at 27 in 2024, up from 34 in 2023. The same report next year would be a tool to objectively evaluate how the enlarged cabinet is able to function.
Businesses should watch the new additions, splits, and reconfigurations of ministries, as there will most likely be revisions of regulations in various sectors which come under these newly defined ministries. There may also be inefficiencies, especially in the initial period, where adjustments of ministries usually involve shifting bureaucratic agencies and regulatory authority, lowering their capacity to regulate effectively.
Summary
The presence of Sri Mulyani and other familiar and experienced figures in Prabowo’s economics team has been well received internationally, and tempered some concerns about the new President’s spending plans. However, the record size of the cabinet and the creation of new ministries has sparked fears of increased bureaucracy and added complexity. The first 100 days of the new government will be watched closely to see how Prabowo can balance his ambitious programmes and while maintaining fiscal discipline and political stability.
Asia House is working with governments across Asia, the Middle East and the West, as well as multilateral organisations and the private sector, to drive commercial and political engagement around key issues in global trade. For more information on our research and programmes, please contact Katie Reid, Stakeholder Engagement Associate via katie.reid@asiahouse.co.uk.
