Jakarta jitters

Fears of a swelling budget deficit, despite attempts to improve efficiency through spending cuts, rattled investors last week.

No, it wasn’t the efforts of a part-time car salesman to boost the US economy by raising unemployment but Indonesia’s hefty expenditure on social programmes that worried them, causing a market sell-off on Tuesday.

International investors have long raved about Indonesia’s burgeoning middle class, but consumption has been slowing, and the latest consumer price figures showed deflation for the first time in 25 years. Even though the rupiah is weakening against the US dollar, the Indonesian central bank has been cutting rates.

Market sentiment was also affected by rumours that long-serving finance minister Sri Mulyani Indrawati would be stepping down, which she denied.

The Indonesian economy grew by 5% in 2024 and the government is targeting 5.2% growth this year, but investors are concerned that President Prabowo Subianto could abandon Indonesia’s recent history of fiscal discipline to fund social improvement programmes. While his government has made efficiency savings by ordering civil servants to turn off lights and air conditioning at the end of the working day, it has committed US$4bn for free school lunches and ultimately plans to spend up to US$28bn on the scheme.

It’s a noble mission, and the World Food Programme reckons that every dollar invested in a school meal scheme yields a US$9 return. That investment will take years to show returns, though, and in the meantime investors are concerned about how it will be funded.

There are also questions over whether bundling state-owned enterprises together under newly formed holding company Daya Anagata Nusantara (Danantara Indonesia) will really produce hoped-for efficiency gains and spur economic activity, or whether political goals will take priority over commercial imperatives.

Indonesia has long been a favourite of international fixed income investors, not least because it is Asia’s biggest sovereign issuer in the G3 market, where it raised over US$10bn last year.

In recent weeks, though, foreign investors have become nervous. Sovereign CDS has widened 16bp in the past month to 86bp, and Indonesia’s US dollar five-year bonds have widened 36bp to Treasuries plus 85bp. The Jakarta benchmark stock index plunged as much as 7% on Tuesday and is down 10% year to date.

Tuesday’s disruption caused Bank Tabungan Negara to pull its US dollar five-year Tier 2 note offering, just a day after Bank Mandiri printed its biggest offshore bond to date, as investors reconsidered the risk premium they want for Indonesian assets.

Prabowo’s goal of turbocharging GDP growth to 8% is admirable, but the size and speed of Indonesia’s economic project means the country’s issuers might have to pay up for funding until the tangible results start to feed through.