Assessing Fiscal Risk and Growth Potential in Indonesia’s Post-Reshuffle Economy

The September 2025 cabinet reshuffle under President Prabowo Subianto has sent shockwaves through Indonesia’s economic landscape, reshaping fiscal priorities and investor perceptions. The abrupt removal of Finance Minister Sri Mulyani Indrawati—a globally recognized symbol of fiscal discipline—has raised urgent questions about policy continuity and the government’s ability to manage a widening deficit. Meanwhile, the appointment of technocrat Purbaya Yudhi Sadewa signals a potential pivot toward technocratic governance, though his mandate faces immediate headwinds from rising social and defense spending demands. For investors, the reshuffle underscores a critical juncture: navigating fiscal risks while capitalizing on Indonesia’s long-term growth drivers in a volatile political and economic environment.

Fiscal Risks: A Tenuous Balance

Indonesia’s 2025 fiscal deficit is projected to rise to 2.8% of GDP, up from 2.3% in 2024, as the government expands social programs and defense budgets [2]. While this remains below the statutory 3% threshold, the departure of Sri Mulyani—a key architect of fiscal restraint—has spooked markets. According to a report by Bloomberg, the Jakarta Composite Index fell 1.3% in the wake of her removal, while the rupiah experienced sharp volatility, reflecting investor unease [3]. Analysts warn that Purbaya, though experienced in financial regulation, may struggle to maintain the same level of fiscal credibility, particularly as demands for increased public spending intensify [5].

The government’s new sovereign wealth fund, Danantara, and its ambitious free school lunch program further complicate the fiscal outlook. These initiatives, while socially progressive, risk inflating deficits if not offset by revenue enhancements or efficiency gains. As stated by Reuters, the market is now scrutinizing whether the new administration can balance populist spending with long-term fiscal sustainability [1].

Growth Potential: Green Industrialization and Strategic Sectors

Despite these risks, Indonesia’s economic fundamentals remain resilient. The OECD projects 4.7% GDP growth for 2025, driven by private consumption and employment gains [2]. A critical growth engine is the country’s downstream industrialization strategy, particularly in nickel and electric vehicle (EV) supply chains. In Q1 2025 alone, Indonesia attracted $13.67 billion in FDI, with the mining sector accounting for 23% of total inflows [1]. This surge is fueled by the 2020 nickel ore export ban, which has incentivized $45 billion in greenfield investments for smelters and battery manufacturing [4].

The government’s downstreaming policy—offering VAT exemptions and production subsidies—has positioned Indonesia as a global leader in nickel processing, now controlling 60% of world production [2]. However, challenges loom: the global shift toward lithium-iron-phosphate (LFP) batteries, which bypass nickel, threatens to erode Indonesia’s competitive edge [4]. To mitigate this, the administration is diversifying into EV vehicle production, with targets to deploy 2 million electric cars and 12 million two-wheelers by 2030 [3].

Investor Sentiment: Caution Amid Strategic Opportunities

Investor sentiment remains cautiously optimistic. While the reshuffle has heightened uncertainty, Indonesia’s strategic role in the “China+1” diversification strategy and its push for green industrialization have attracted interest from global investors seeking alternative manufacturing hubs [3]. The government’s infrastructure upgrades and digital connectivity initiatives further enhance long-term appeal [4].

Yet, risks persist. Over-reliance on commodities, geographic disparities, and the potential for capital flight due to fiscal mismanagement remain red flags. As noted by the Asian Development Bank, policy clarity and transparency will be pivotal in sustaining investor confidence [3]. For now, investors are advised to adopt a hedged approach, prioritizing sectors with structural growth—such as EVs and nickel—while closely monitoring fiscal policy developments.

Conclusion: Positioning for a Dual Narrative

Indonesia’s post-reshuffle economy presents a dual narrative: fiscal fragility coexisting with transformative growth potential. For strategic investors, the key lies in balancing short-term risks—such as deficit pressures and policy uncertainty—with long-term opportunities in green industrialization. The success of this transition will hinge on Purbaya’s ability to uphold fiscal discipline while advancing the government’s ambitious agenda. As the market watches for signals of policy continuity, Indonesia’s economic trajectory will remain a test of governance and resilience.

Source:
[1] Indonesia Assets Feel Jitters as Analysts Flag Fiscal Concerns, [https://www.bloomberg.com/news/articles/2025-09-08/indonesia-assets-feel-jitters-as-analysts-flag-fiscal-concerns]
[2] Indonesia: OECD Economic Outlook, Volume 2025 Issue 1, [https://www.oecd.org/en/publications/oecd-economic-outlook-volume-2025-issue-1_83363382-en/full-report/indonesia_4c4ce2be.html]
[3] Strengthening Policy Synergy for Indonesia's Stability and Growth, [https://amro-asia.org/strengthening-policy-synergy-for-indonesias-stability-and-growth-june-2025/]
[4] Indonesia Economy 2025 Outlook: Unlocking Investment, [https://viettonkinconsulting.com/invest/indonesia-economy/]
[5] Indonesia Ousts Top Finance Chief, Markets React Swiftly, [https://finimize.com/content/indonesia-ousts-top-finance-chief-markets-react-swiftly]