Overview
Today's Deep Dive is 1,234 words and an 8-minute read.
On October 20, Prabowo Subianto took office as Indonesia’s eighth president, marking the beginning of a new era in the country’s political and economic history. A former army general with a history of nationalist rhetoric, Prabowo espouses a vision of economic sovereignty and strong governance. His leadership comes at a pivotal time for Southeast Asia’s largest economy, with Indonesia positioned as a strategic player amid rising US-China competition and on the brink of significant domestic policy shifts. Global businesses operating in or engaging with Indonesia will need to effectively navigate the complexities of Prabowo’s agenda, which blends policy continuity with an assertive approach to growth and governance.
Economic Growth and Strategic Resource Development
A central focus of Prabowo’s presidency is economic growth, setting a specific goal of raising Indonesia’s growth rate to 8% annually within his five-year term. Prabowo’s economic strategy builds on the “downstreaming” policies initiated by his predecessor, Joko Widodo (Jokowi), which aims to process more of Indonesia’s raw materials domestically rather than exporting them in unrefined forms. The most notable example of this initiative has been in nickel, where a 2020 ban on raw ore exports led to significant investments in domestic processing plants, primarily from Chinese companies.
Analysts expect Prabowo to expand this policy beyond nickel, incorporating other key commodities, such as palm oil, copper, and bauxite. The downstreaming strategy aligns with Prabowo’s broader aim of achieving greater self-sufficiency in Indonesia’s industrial sector, which he has claimed will generate jobs, increase exports of high-value goods, and reduce the country’s dependence on volatile global markets. This could present opportunities for foreign firms in sectors like manufacturing and energy, as Indonesia seeks partnerships to develop its processing industries. Yet challenges persist, particularly concerning the environmental and social impacts of Indonesia’s industrialization initiatives that have been a source of tension with local communities and environmental groups.
Governance, Fiscal Policy, and Social Agenda
Prabowo’s governance approach reflects his desire for strong, centralized authority, as demonstrated by his decision to appoint the largest cabinet since 1966, with 109 members. The “Red and White Cabinet,” alluding to the colors of Indonesia’s national flag, includes a mix of technocrats and political figures from a broad coalition of seven parties, a move seen as essential to ensuring political stability but criticized for potentially bloating the bureaucracy. Prabowo’s ability to manage this large and diverse coalition may prove crucial for implementing his ambitious agenda.
On the fiscal front, the Prabowo administration faces notable hurdles. The centerpiece of his social agenda is a $30 billion school lunch program aimed at reducing child malnutrition and improving educational outcomes. While the initiative has been well-received for its potential long-term benefits, it has also raised concerns about fiscal sustainability, particularly given the large scale of the program relative to Indonesia’s overall budget. The program will be financed in part through a major overhaul of the country’s tax system, with Prabowo having pledged to improve tax compliance, seeking to boost tax revenue to 18% of the country’s gross domestic product (GDP). On the other hand, Prabowo will reportedly review the possibility of lowering the corporate income tax to 20% from 22%, though this would hinge on its impact on revenues.
Prabowo’s broader fiscal policy includes ambitious spending plans on defense, infrastructure, and civil servant salaries. While he has pledged to keep the budget deficit within the government’s 3% cap, analysts have warned that these spending commitments could strain Indonesia’s finances, especially if tax reforms and other revenue-boosting measures fail to materialize. The multibillion-dollar planned relocation of the country’s capital from Jakarta to Nusantara, set in action by Jokowi and continuing under Prabowo, adds further headwinds.
Strategic Non-Alignment and Implications for FDI and Trade
In the foreign policy realm, Prabowo has reaffirmed Indonesia’s long-standing policy of strategic non-alignment, a delicate balancing act between competing global powers, particularly the United States and China. In terms of foreign direct investment (FDI), Indonesia is increasingly a battleground for influence between the two countries, with China dominating in areas like infrastructure investment and mineral processing, while the US seeks to expand its role through initiatives in clean energy and security cooperation.
Indonesia’s decision to abstain from BRICS membership serves as a statement of its focus on avoiding entanglement in geopolitical alliances, differing from other non-aligned countries, such as India, a BRICS member. At the same time, the opening of accession discussions for Indonesia to join the Organization for Economic Cooperation and Development (OECD) on February 20, six days after Prabowo’s election win, signals that the country will continue to aim to align more closely with Western economic frameworks under the new administration.
Prabowo has made his intent clear to maintain a stance of neutrality while pushing for increased FDI from different geopolitical camps. During his inauguration, he emphasized that Indonesia would remain “friends to all,” a message underscored by the presence of representatives from the US, China, Russia, Europe, and Japan, among other countries, at the ceremony. The continuation of large infrastructure projects provides further opportunities for foreign investors, particularly in construction, logistics, and energy.
However, Indonesia’s downstreaming policies, namely in nickel, have already strained Indonesia’s relations with certain trading partners. The European Union has voiced concerns over Indonesia’s export restrictions, and similar tensions could arise as Prabowo extends these policies to other commodities. For global businesses, navigating such political factors affecting Indonesia’s trade and FDI policy under Prabowo will be key to capitalizing on opportunities in Indonesia’ resource and infrastructure sectors.
Key Risks and Opportunities for Global Businesses
Prabowo’s presidency presents a range of risks and opportunities for global businesses. On the upside, Indonesia’s focus on resource processing and industrial development stands to potentially create significant prospects in sectors such as manufacturing, energy, and infrastructure. The expansion of downstreaming policies to new commodities and the continued development of major infrastructure projects like Nusantara could attract an array of foreign investment while generating new business opportunities across sectors.
With this said, substantial risks remain. Prabowo’s aggressive fiscal spending, including on social programs like the free school lunch initiative, raises concerns about the sustainability of Indonesia’s public finances. If revenue-boosting measures, such as tax reforms, fail to keep pace with spending, Indonesia could experience growing budget deficits, which could dampen investor confidence and impact economic stability.
Political risks present another key factor for global businesses to consider. Prabowo’s large and diverse cabinet, while aimed at maintaining political stability, could result in bureaucratic inefficiencies and slow decision-making. Prabowo’s history as a military general with allegations of past human rights abuses has also raised concerns among international observers about the potential for authoritarian tendencies to emerge during his presidency. While Prabowo has pledged to uphold democracy, the consolidation of power within his administration risks undermining Indonesia’s democratic institutions and rule of law.
Prabowo’s rule in Indonesia amid the current geopolitical environment provides a combination of challenges and possibilities. Indonesia’s non-alignment in great power competition faces increasing pressure as geopolitical tensions, such as in Russia and Ukraine, as well as in the Middle East, remain at risk of further escalation. The country’s position in sectors including technology and energy, which are focal points in US-China economic competition, is becoming more precarious as trade policies shift in accordance with national security priorities. How Indonesia under Prabowo navigates this delicate balance stands to impact its foreign relations and internal development, especially as it seeks to maintain neutrality while benefitting from partnerships with opposing great powers.
