Indonesia's Fiscal Resilience: Can Budget Management Weather Commodity Storms?

As global commodity prices swing wildly, Indonesia—a major exporter of oil, coal, palm oil, and minerals—is under pressure to balance its fiscal health amid economic uncertainty. The government's recent budget decisions and debt trajectory provide clues about its ability to sustain growth and attract investors. Let's dissect the numbers.

Fiscal Deficits: A Tightrope Walk

Indonesia's fiscal deficit rose to 2.75% of GDP in 2024, up from 1.61% in 2023, and is projected to reach 2.8% in 2025. While this exceeds pre-pandemic lows, it remains within the government's self-imposed 3% limit. The increase stems from costly programs like the free meals initiative for schoolchildren and pregnant women, the launch of the Danantara sovereign wealth fund, and a temporary electricity subsidy. These expenditures added 1.6% of GDP to the deficit, but were offset by 1.3% of GDP in spending cuts, keeping the deficit manageable.

Debt Dynamics: A Gradual Climb, Not a Crisis

Government debt stands at 38.8% of GDP in 2024, projected to rise to 39.0% by 2025 and 40.0% by 2027. While this trend is upward, it's far from alarming. For context, Indonesia's debt-to-GDP ratio hit a record high of 87.4% in 2000, and the current level is half that. The IMF and OECD agree: this trajectory is sustainable, especially given the dominance of long-term debt. Over 85% of Indonesia's external debt is long-term, reducing refinancing risks.

Revenue Volatility: A Rocky Start to 2025

The first quarter of 2025 delivered a shock: total state revenue fell 17% year-on-year, with tax revenue down 3.9% and non-tax revenue plummeting 26%. The decline was partly due to weaker corporate earnings and reduced foreign investment inflows. However, March 2025 saw a rebound, with tax revenue jumping 15.2% month-on-month, driven by improvements in Income Tax Article 21 (linked to employee incomes) and Domestic VAT (tracking manufacturing activity).

The Ministry of Finance attributes this recovery to better tax administration via the Coretax system, which streamlines compliance. While Q1's contraction is concerning, it's worth noting that 2024's revenue hit a record high of IDR 2,842.5 trillion—so 2025's slump may reflect cyclical factors rather than systemic failure.

Risks on the Horizon

1. Commodity Volatility: Indonesia's reliance on oil, coal, and palm oil means its revenue could crater if prices collapse.
2. Global Trade Tensions: A slowdown in China's economy—Indonesia's largest trading partner—could dent exports.
3. Fiscal Policy Uncertainty: While the 2025 deficit is under control, further spending on social programs or infrastructure could strain budgets.

Investment Implications: Bonds vs. Equity

• Sovereign Debt: Indonesia's 10-year government bonds yield ~6.5%, offering a safer haven compared to equities. The low debt-to-GDP ratio and prudent fiscal management suggest limited default risk.
• Equity Markets: Look to sectors insulated from commodity swings:
• Manufacturing: Benefiting from domestic demand and EV battery supply chains (e.g., PT Timah for tin, a key EV component).
• Consumer Staples: Companies like Unilever Indonesia or Sinar Mas Consumer Products with stable demand.
• Infrastructure: The Danantara fund will likely fund projects in transportation and energy, creating opportunities in construction and utilities.

Final Take

Indonesia's fiscal strategy is a study in balance: it's expanding social programs while keeping deficits in check, and its debt trajectory is sustainable. Investors should monitor commodity prices and corporate earnings, but the broader picture suggests resilience. For now, sovereign bonds are a safe bet, while equity investors should focus on sectors with domestic growth drivers.

Joe's Call: *Hold IDR-denominated bonds for yield and diversification. For equities, target manufacturing and consumer staples—avoid pure commodity plays.