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Indonesia's plan for free student meals raises concerns; higher spending may risk debt

TraderKnows
TraderKnows
07-08

Recently, Indonesian President Prabowo Subianto, although not yet officially inaugurated, has already started planning. However, the current poor economic situation in Indonesia cannot support large expenditures.

Indonesia's president-elect, Prabowo Subianto, plans to provide free meals for students. However, his expansive spending promises have caused concerns in the nation's debt and currency markets.

Prabowo and his team have made efforts to distance themselves from any suggestions of fiscal recklessness, assuring market participants that the new government will adhere to the legal debt limits and keep the budget deficit within 3% of the economic output.

However, for markets that have become accustomed to stability and fiscal prudence under the current Finance Minister Sri Mulyani Indrawati, even the suggestion of significant spending is unsettling.

Despite the weakened currency being primarily due to a strong dollar, bond yields have risen, and the Indonesian Rupiah has depreciated.

Jenny Zeng, Chief Investment Officer for Fixed Income at Allianz Asia Pacific, stated, "Our base expectation is that this is currently just noise, but we do see increased fiscal risks, so the market might start demanding a higher risk premium for Indonesian government bonds."

"Another risk is the change of ministers," Zeng added, noting the uncertainty over who will replace the highly regarded former World Bank Managing Director, Sri Mulyani.

A Chinese banker in Indonesia mentioned that fiscal concerns have driven him to move about 30% of his portfolio to short-term instruments, diversifying into short-term securities (SRBI) issued by Bank Indonesia.

Prabowo won the election in February but will not take office until October. His free meals initiative is expected to cost 710 trillion Rupiah (approximately 4.35 billion U.S. dollars) by 2025, a figure that theoretically shouldn't cause alarm.

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