JAKARTA- Indonesia’s government expects economic growth in 2025 to be within a range of 5.1 percent to 5.5 percent , Finance Minister Sri MulyaniIndrawati told parliament on Monday, which is slightly below a previous forecast range of 5.3 percent to 5.6 percent
The growth outlook, along with predictions on bond yields and rupiah exchange rate, were discussed as the basis of the government’s 2025 budget.
Outgoing President Joko Widodo will firm up the figures and present the 2025 budget to parliament in mid-August and lawmakers are expected to debate the plans the month after, even though his successor Prabowo Subianto will take over in October.
Officials have said president-elect Prabowo’s transition team is working with the finance ministry so that the 2025 budget will reflect his plans after taking office.
Sri Mulyani said new initiatives on nutrition improvement for school children, Prabowo’s flagship program, will be part of the 2025 fiscal plans, but did not offer details.
Some analysts have warned about the high cost of Prabowo’s signature campaign pledge to give free meals to 83 million children, saying it could undermine Indonesia’s track record of fiscal discipline.
His team had estimated in February it could cost $7.7 billion in its first year. Prabowo’s camp says it could spur growth by as much as 2.6 percentage points when fully implemented by 2029.
Despite the downgrade in the economic growth outlook, the government will design next year’s budget with a deficit plan of between 2.45 percent and 2.82 percent of GDP, close to the previously given range of 2.48 percent to 2.80 percent of GDP.
In comparison, this year’s budget deficit plan is 2.29 percent of GDP and the previous year’s deficit was 1.65 percent of GDP.
The public debt-to-GDP ratio will be kept within a range of 37.98 percent to 38.71 percent next year, Sri Mulyani said, roughly around where it was by the end of the first quarter.
The outgoing finance minister underlined the importance of managing healthy fiscal metrics, especially as Indonesia relies more on market-based financing, instead of bilateral or multilateral loans, to plug its budget gap.
“A significant widening of the fiscal deficit has the potential to increase bond yields, pressure the rupiah exchange rate, raise domestic interest rates and in turn, this will reduce the private sector activity, which is often described as the crowding out effect,” she said.
Meanwhile, Indonesia’s central bank will keep its key interest rate on hold through next quarter to support a weak rupiah and only a slim majority expect a Q4 cut which would be after the likely start of policy easing in the United States, a Reuters poll found.
Bank Indonesia (BI) unexpectedly raised its seven-day reverse repurchase rate to 6.25 percent last month – the highest since it made the instrument its main policy rate in 2016 – to bolster currency stability.
Since then the rupiah has gained over 1 percent , suggesting pressure to continue tightening had eased somewhat but a rate cut was still months away as the currency is down about 3.5 percent for the year, slightly less than some of its Asian peers.
The key interest rate is likely to be unchanged at 6.25 percent at the conclusion of BI’s two-day meeting on May 22, all 33 economists in the May 13-17 poll said.
Median forecasts showed interest rates on hold through the third quarter, followed by a 25 basis point cut to 6.00 percent before year-end.
“Persistent rupiah weakness means BI’s move is constrained by the dollar’s strength and what the Fed does, and we think the risks are skewed to a slower start of the rate cutting cycle,” said Makoto Tsuchiya, economist at Oxford Economics.
“We expect BI to keep utilizing various policy tools other than the policy rate, including forex intervention. Modest investment growth in Q1 should make BI wary of over-tightening.”
To support the currency the central bank has been dipping into its forex reserves which have fallen to $136 billion, down $4.2 billion in April alone – the biggest drop in 11 months.
Still, risks for the rupiah falling further remain high due to a hawkish Fed outlook with the first cut now expected in September and could be postponed further if economic US indicators remain resilient, impacting BI’s rate outlook
Among those who provided forecasts until year-end, a slim majority, 17 of 31, expected interest rates at 6.00 percent or lower, but 14 saw them at 6.25 percent or higher.
“A BI rate cut is highly unlikely in the face of the Fed’s prolonged hold,” said Elbert Timothy Lasiman, economist at Bank Central Asia.
“Domestically, there is little change, as BI would actually prefer to ease policy to support flagging growth. What changes is the global landscape, where…the market is starting to price in the possibility of “high for longer” again.”
