Prabowo's free-meal plan stirs investor fears about Indonesia's finances

JAKARTA/SINGAPORE — Indonesia's President-elect Prabowo Subianto wants to give school children free meals, but the plan and his pledge to be 'daring' on spending have the country's debt and currency markets on edge.

Prabowo and his team have tried to distance themselves from any suggestions of fiscal profligacy, and to assure market participants the incoming government respects the legal debt limits that cap its budget deficit at three per cent of economic output.

But for a market just getting accustomed to stability and recognition for fiscal prudence under current Finance Minister Sri Mulyani Indrawati, the mere suggestion of heavy spending has been unsettling.

Bond yields have risen and the rupiah has depreciated, though the currency weakness has largely been due to a resilient US dollar.

"Our base case remains that this is more of noise at the moment, but we do see increasing fiscal risk and hence the market may start to require more risk premium on Indonesian government bonds," said Jenny Zeng, chief investment officer for APAC fixed income at Allianz.

"Also another risk is because there's a change of ministers," Zeng said, referring to uncertainties about who will step into the shoes of the highly acclaimed ex-World Bank managing director Sri Mulyani.

A banker at a Chinese lender in Indonesia said the fiscal concerns had prompted it to move around 30 per cent of its portfolio into lower-tenor instruments, including diversifying into rupiah-denominated short-term securities (SRBI) issued by Bank Indonesia.

Prabowo won the election in February, but takes office only in October. His free-meal plan, which his team estimates will cost 71 trillion rupiah (S$5.87 billion) in 2025, should ordinarily not cause any