Get your free copy of Editor’s Digest
FT editor Roula Khalaf picks her favourite stories in this weekly newsletter.
Indonesia’s President-elect Prabowo Subianto would allow the national debt to increase to 50% of GDP to fund an ambitious spending plan if the government can raise tax revenue, one of his aides said.
Prabowo’s brother, prominent businessman Hashim Djojohadikusumo, told the Financial Times that Indonesia could still maintain its investment grade rating even if its debt-to-GDP ratio rose to 50 percent from the current 39 percent.
“The idea is to raise revenue and raise the debt level,” Hashim said in London. “I’ve spoken to the World Bank and they think 50 percent would be sensible.” Under Indonesian law, Indonesia’s debt-to-GDP ratio cannot exceed 60 percent.
“We don’t want to increase debt levels without increasing revenues,” Hashim added, pointing to “taxes, excise duties, royalties from mining, import tariffs.”
Prabowo’s government’s borrowing plans mark a major shift from the fiscal conservative stance of former President Joko Widodo, who transformed Indonesia into a resource-rich powerhouse.
Hashim, one of Prabowo’s closest advisers and a key influencer when a new government takes office in October, said his comments were the first public confirmation of plans to increase borrowing and came days after other advisers rejected the 50 percent target first reported by Bloomberg.
Economists have warned that a 50 percent debt ratio would push the budget deficit above the legal limit of 3 percent and could also weigh on the rupiah, which has already fallen more than 5 percent against the dollar this year.
The World Bank did not respond to a request for comment.
Prabowo’s flagship spending item is a free school-meal program for schoolchildren and pregnant women, which aides estimate will cost $28 billion.
Hashim said the feeding program would act as an “economic stimulus” and boost GDP by at least 1.2 percentage points. But he stressed that the increase in the debt ratio would only be justified if government revenue also increased. Indonesia’s revenue-to-GDP ratio is the lowest in Southeast Asia, at about 14 percent, according to IMF data.
He added that several other initiatives, including building more power plants, refineries, housing and expanding food production, would support Prabowo’s annual growth target of 8 percent.
Prabowo plans to set up a national tax agency to raise revenue, but economists warn that will not be easy, and he is also considering cutting subsidies and selling state assets to raise more revenue.
Hashim met with businesses and consultants in Jakarta in June and said Prabowo’s government would gradually achieve its goal of reducing debt to 50 percent of GDP by 2 percent per year over his five-year term, according to a person familiar with the matter.
Hashim told the Financial Times that the increased debt level would be in line with other Southeast Asian countries. “It would still be investment grade,” he said. Ratings agencies Moody’s, S&P and Fitch all rate Indonesia’s bonds one notch above minimum investment grade. Fitch has said a large increase in government debt would weaken Indonesia’s sovereign credit profile.
Hashim, whose mining, agriculture and commodities business is Alsari Group, is also fighting a tax fraud case in Geneva, where authorities auctioned his family’s villa in April as part of a tax recovery effort.
Hashim and his wife Annie argued that they were insolvent after spending hundreds of millions of dollars to rescue Prabowo’s businesses and fund his last election campaign. A Swiss court rejected the insolvency claims.
Hashim told the Financial Times he would continue to fight the case. “I[going to settle]”I’ve been fighting the Swiss for 20 years and they’ve been very, very unreasonable.”
