A victory by former army general Prabowo Subianto in Indonesia’s presidential election tomorrow would alter the country’s fiscal policy after more than a decade of debt reduction.
The CHART OF THE DAY shows Indonesia’s government debt-to-gross domestic product ratio declined to 26 percent last year from 95 percent in 2000 while state spending as a percentage of GDP held steady. The lower panel compares official expenditures in Southeast Asia’s biggest economy with those of No. 2 Thailand. Prabowo, 62, sees the economy as “underleveraged” and would raise its debt-to-GDP ratio toward 50 percent, Hashim Djojohadikusumo, his brother and economic adviser, said last month.
“Clearly he wants to increase spending and that can be positive if it’s appropriately channeled to things like infrastructure, education, health,” said Philip McNicholas, a senior economist at BNP Paribas SA in Hong Kong. “But any loss of the broader fiscal discipline will be viewed negatively by the rating agencies and the market, especially if you can’t raise revenue at the same time.”
Prabowo’s plans include raising $300 billion from the capital markets over five years to achieve a 10 percent growth rate, Hashim said. The rupiah fell in the month through July 4 as the ex-army general closed in on Jakarta Governor Joko Widodo’s lead in polls. The currency rebounded yesterday on speculation a strong showing by Widodo, 53, in the final debate on July 5 increased his chances of winning.
The last time Indonesia had debt exceeding 50 percent of GDP was about a decade ago. Since then, it’s won credit rating upgrades, with Fitch Ratings bringing it to investment grade in 2011. The nation’s debt position has benefited from economic growth and a law capping the budget deficit at less than 3 percent of GDP, according to Michelle Chia, a regional economist at CIMB Investment Bank in Kuala Lumpur.
Indonesia’s economy expanded 5.21 percent in the first quarter from a year earlier, the least since 2009. Annual growth averaged 5.8 percent in the 10 years through 2013. Survey company Roy Morgan said the election is “too close to call,” with a recent poll showing 52 percent support for Widodo and 48 percent for Prabowo.
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