Indonesia's Fiscal Policy Shift and Its Implications for Emerging Market Investors

In the first year of his presidency, Prabowo Subianto has reshaped Indonesia's fiscal landscape with a blend of populist spending, re-centralized governance, and ambitious infrastructure goals. For emerging market investors, this shift presents a dual-edged sword: opportunities in sectors like education and energy, but risks tied to fiscal discipline and political volatility.

Key Fiscal Reforms and Their Implications

Prabowo's administration began with a dramatic Rp 306 trillion (8%) budget cut in early 2025, redirecting funds to flagship programs such as the Free Nutritious Meals (MBG) initiative and school infrastructure upgrades Why Prabowo's misguided 'austerity' is emblematic of his free-wheeling economic policy^[1]. While this aligns with his campaign promise to address stunting and human capital development, the move has delayed 21 infrastructure projects, including irrigation and road preservation, due to a slashed Public Works Ministry budget 2025 budget cuts: 21 projects to be affected by efficiency^[2]. Critics argue the cuts risk undermining long-term growth, particularly as Indonesia's fiscal deficit remains within the 3% legal ceiling but faces scrutiny for being “untimely” amid deflationary pressures Why Prabowo's misguided 'austerity' is emblematic of his free-wheeling economic policy^[1].

The abrupt replacement of Finance Minister Sri Mulyani Indrawati in late August 2025 further muddied the waters. Mulyani, a symbol of fiscal prudence who maintained Indonesia's investment-grade credit rating, was succeeded by Purbaya Yudhi Sadewa, a market-oriented economist with less public finance experience. As noted by Bloomberg, this shift has raised investor concerns about a potential pivot toward populist spending, particularly for programs like the MBG, which now accounts for Rp 335 trillion (US$20.6 billion) in the 2026 budget Investor Doubts Over Indonesia Grow After Finance Minister Departure^[4].

Opportunities in Prabowo's Economic Vision

Despite the risks, Prabowo's 2026 budget—projected at Rp 3,786.5 trillion ($234 billion)—highlights strategic investments that could attract capital. The administration's focus on energy security, with a doubling of energy spending to Rp 402.4 trillion, signals a push to reduce reliance on imports and boost domestic renewables Prabowo's 2026 State Budget Pours Trillions Into Energy, Food, and Education^[3]. Similarly, the Red and White Village cooperatives, designed as rural economic hubs, may open avenues for agribusiness and microfinance investments Indonesia Unveils Bold Tax Reforms And Welfare Plans^[5].

The government's emphasis on tax compliance without introducing new levies—aiming to raise the tax-to-GDP ratio to 10.47%—also offers a glimmer of stability. Finance Minister Mulyani's prior efforts to strengthen voluntary compliance in the informal sector, as reported by Evrim Ağacı, suggest a cautious approach to revenue expansion Indonesia Unveils Bold Tax Reforms And Welfare Plans^[5].

Risks for Investors

The primary risk lies in fiscal discipline. While the 2026 deficit of 2.48% of GDP appears manageable, economists like Wijayanto Samirin warn that achieving this target will require stringent oversight, given the scale of social spending Why Prabowo's misguided 'austerity' is emblematic of his free-wheeling economic policy^[1]. The removal of Mulyani, who had secured Indonesia's investment-grade rating, has already triggered investor skepticism. Reuters notes that the new finance minister's focus on liquidity measures and program acceleration may lack the technical rigor needed to maintain fiscal health Investor Doubts Over Indonesia Grow After Finance Minister Departure^[4].

Additionally, regional discontent looms large. Prabowo's proposal to cut 2026 regional funding by 25% to 650 trillion rupiah ($40 billion) has sparked protests, with local leaders fearing tax hikes to compensate for reduced central support Why Prabowo's misguided 'austerity' is emblematic of his free-wheeling economic policy^[1]. Such tensions could destabilize the political environment, deterring foreign direct investment (FDI) in the short term.

Balancing Act: Growth vs. Prudence

Prabowo's administration faces a delicate balancing act. On one hand, its emphasis on food resilience, education, and infrastructure aligns with long-term growth drivers. On the other, the abrupt policy shifts and populist spending risks eroding investor confidence. The Rp 24.44 trillion economic stimulus package announced in September 2025—aimed at bolstering liquidity and accelerating projects—signals a temporary reprieve, but its success hinges on effective implementation Gov't Rolls out Economic Stimulus Packages to Maintain Economic Growth^[6].

For investors, the key will be monitoring two metrics:
1. Fiscal discipline: Can the government maintain a deficit below 3% of GDP while funding ambitious programs?
2. Political stability: Will regional protests or ministerial reshuffles disrupt policy continuity?

Conclusion

Indonesia's fiscal policy under Prabowo Subianto is a high-stakes experiment in balancing populist priorities with economic pragmatism. While the focus on education, energy, and rural development offers compelling investment opportunities, the risks of fiscal overreach and political fragmentation cannot be ignored. Emerging market investors must weigh these factors carefully, prioritizing sectors aligned with the administration's long-term vision while hedging against short-term volatility.