Indonesia’s president is jeopardising the economy and democracy

From time to time Prabowo Subianto, Indonesia’s president, evinces magnanimity towards his critics. “Am I really an authoritarian?” he asked last year. “I don’t think so…Criticism is good. [We] must not be driven by anger or resentment.” At other times a harsher side emerges. “Foreign powers”, he fumed last June, “fund NGOs to sow discord among us. They claim to be upholders of democracy, human rights, freedom of the press, when in fact, those are their own versions.” For a thuggish general who has refashioned himself as a cat-cuddling grandpa, a little ambiguity is inevitable. But Mr Prabowo’s temperament is so mercurial that even his allies fear for Indonesia’s macroeconomic stability and for its democracy.

Mr Prabowo is centralising power and, in keeping with his long-professed disdain for multiparty democracy, marginalising legislative opposition. He is spending beyond Indonesia’s means, installing close allies in senior economic posts and giving the armed forces a bigger role in public life. The result looks to some like an incipient reversal of the reforms that have underpinned Indonesia’s stability since the Asian financial crisis of 1997-98. That crash drove tens of millions into poverty and initiated an era of political instability, Islamist terror attacks and separatist insurgencies. Similar upheaval today would not only harm Indonesia’s 290m people, but also alarm neighbours such as Australia and Singapore, imperil exports of nickel and other commodities and undo 20 years of economic and political progress in the world’s biggest Muslim-majority country.

Mr Prabowo’s most obvious departure from Indonesia’s recent norms has been in his lavish spending. He has launched two massive populist projects: a free-school-meals scheme, meant to tackle stunting among schoolchildren, and a network of 80,000 village-level agricultural co-operatives, meant to displace middlemen who bilk farmers. A conservative estimate suggests the two initiatives alone could cost at least 320trn rupiah ($18bn) this year, or 10% of budgeted revenue.

That may be understating the drain on Indonesia’s finances. Under Mr Prabowo budget forecasts have been unduly optimistic. Low prices for exports such as coal, nickel and palm oil have dented tax revenue, which fell by 3% in 2025, defying the assumed 7% rise. That has not stopped Mr Prabowo, who has paid for his schemes by slashing other spending and allowing the deficit to grow.

Last year’s fiscal deficit, at 2.9% of GDP, was Indonesia’s largest ever, excluding the pandemic. That puts it alarmingly close to the 3% cap imposed by law since 2003, in an effort to entrench fiscal rectitude. S&P, a ratings agency, may soon give Indonesian government debt its first downgrade since the Asian financial crisis. Aggrieved officials point out that the debt-to-GDP ratio, at just 40%, is quite low. However, debt is repaid from tax revenue and debt servicing is consuming a growing share of it. Last year 16% of revenue went on interest, up from 9% a decade ago, according to S&P. It says a “sustained” rise over 15% could justify a downgrade.

The war in Iran is exacerbating the pressure. Although Indonesia is a net exporter of energy, largely in the form of coal, it is a net importer of crude oil. The government subsidises fuel and electricity, a measure it had expected to cost $12bn this year (nearly 7% of budgeted revenue) before the oil price shot up. Revenue will rise somewhat, thanks to higher coal and nickel prices. The government is planning a windfall tax on exports. But oil and gas prices have risen by much more, so any boost to revenue will be overwhelmed by a ballooning bill for subsidies. The finance ministry thinks an extra $5.7bn may be needed. It has forecast that, if oil averages $97 a barrel this year, the deficit will rise to 3.5% of GDP, exceeding the 3% cap.

Officials in Jakarta, the capital, claim the cap is artificially tight and should be suspended. It was copied, somewhat arbitrarily, from the EU’s debt rules, they note. Other South-East Asian countries have run bigger deficits without prompting crises. But in March Mr Prabowo, who during his campaign suggested the cap might be holding the economy back, told Bloomberg he would not suspend it “unless there’s a very big emergency like covid”.

Mr Prabowo has trimmed the free-meals programme from six days a week to five, saving around $1.1bn. He has also limited purchases of subsidised petrol to 50 litres per vehicle per day. In theory a cost-cutting drive will save $7.4bn this year, through measures such as having bureaucrats work from home and reducing official travel. But that comes on the heels of a similar push last year, which failed to stop the deficit widening.

In all likelihood, Mr Prabowo will either have to cut fuel subsidies or curtail his spending programmes or jettison the 3% cap. Fuel subsidies were last trimmed after oil prices jumped following Russia’s invasion of Ukraine in 2022. That sparked big street protests. Especially for a populist who campaigned on a promise to curb greedy elites and ensure the masses benefited more from Indonesia’s resources, another increase in the petrol price is not an appealing option.

Instead the government seems to be in denial. For most of the past 20 years Sri Mulyani Indrawati, finance minister for all of the past three presidents, including Mr Prabowo, has instilled fiscal discipline. But in September Mr Prabowo sacked her, appointing in her stead the little-known and pugnacious Purbaya Yudhi Sadewa. Recent targets of his ire have included lazy customs officers (“I’ll fire them”), the IMF (“stupid”), a local economist for Citigroup (“not a real economist”) and The Economist (also “stupid”). Mr Purbaya insists everything is fine. “If oil prices increased to $100 per barrel [on average during 2026] the deficit can be pushed down [to] around 2.3%” of GDP through spending cuts and revenue-raising, he told The Economist. “So we are safe. I told the president, ‘Don’t worry about developments in the global economy, in the global oil price’.”

The finance ministry is not the only institution Mr Prabowo has overhauled. Management of state-owned enterprises (SOEs) has been handed to Danantara, a new sovereign-wealth fund answering directly to Mr Prabowo. The big SOEs have increased dividends, generating funds for Mr Prabowo’s pet projects. Indonesia’s state-owned banks have gone further, not only raising dividends but also handing preferential loans to politically favoured projects. As of November three of the biggest had lent $8bn to Agrinas, a state-owned firm managing Mr Prabowo’s village co-operatives programme.

The nominally independent central bank, Bank Indonesia (BI), has launched a programme of “burden sharing”, meaning that it pays higher interest rates on the government’s deposits, with the explicit objective of supporting Mr Prabowo’s co-operatives scheme and other projects. In January Mr Prabowo installed his nephew, Thomas Djiwandono, high up at the central bank. The appointment of the admittedly capable Mr Djiwandono has coincided with a debate in parliament about whether legislators should give themselves the power to dismiss BI’s governor. That would compromise the governor’s independence.

Mr Prabowo’s government also seems to be trying to squeeze more revenue out of the private sector. Tycoons have been tapped to buy $3bn in “patriot bonds” paying below-market interest rates, to finance a project backed by Danantara to convert waste to energy. The ethnic-Chinese bosses who run Indonesia’s biggest private conglomerates have snapped them up, eager to signal political loyalty. They may be mindful of $320m prosecutors are seeking from Nadiem Makarim, a former education minister and founder of Gojek, Indonesia’s biggest tech unicorn, for alleged corruption. He says the case is spurious and that other entrepreneurs are now frightened, too.

The government has also confiscated millions of hectares of land from alleged rule-breakers in the palm-oil and mining industries. Few doubt that environmental rules are being flouted, but enforcement appears selective. Fines could yield $8bn this year, according to the attorney-general. “It may be necessary to be a little authoritarian to combat these corruptors,” Mr Prabowo said in February of those pillaging Indonesia’s natural resources.

To ensure his plans come to fruition, Mr Prabowo has been centralising political power. He has brought seven of the eight parties with members in the lower house of parliament into his coalition, accounting for 91% of seats. The sole holdout is wavering. Last year Mr Prabowo gathered the leaders of those parties at his ranch in the hills above Jakarta to suggest making their coalition “permanent”.

Mr Prabowo depicts this opposition-less politics as an expression of Indonesian values. In a speech shortly before he became president, he declared that Indonesians needed to co-operate, not argue. “Opposition”, he said, was “Western culture”, and there was no need to copy it. (He did not explain why he himself had been so energetic in opposition to the governments of the day from 2009 to 2019.)

The president, a former general, is also according the army a bigger role in public life. In 2024, soon after taking office, he flew ministers out to a military training academy, dressed them in fatigues and put them through marching drills and other team-building exercises. Even the urbane Ms Sri Mulyani stood to attention. Since then several thousand civil servants have been sent on similar courses to get a taste of military discipline and join the army’s reserves. The armed forces are also playing a big role in Mr Prabowo’s free-meals programme, operating at least 452 kitchens, and in building warehouses and shops for his village co-operatives.

Last year Mr Prabowo’s Gerindra party sought to formalise the armed forces’ expanded role by revising the armed-forces law to allow soldiers on active duty to serve in civilian posts. That has brought back memories of the army’s “dual function” under Suharto, Indonesia’s dictator from 1967 to 1998, in which it took on a big role running the country and staffing the bureaucracy. Activists challenged the law in court. On March 12th one of the activists working on the court case, a 28-year-old lawyer named Andrie Yunus, was assaulted as he rode his motorbike home. Assailants threw acid at him, leaving him with excruciating burns. Mr Prabowo denounced the attack, and a military court on April 30th charged four officers in the military intelligence agency with perpetrating it.

That episode, in turn, brought back memories of Mr Prabowo’s own chequered past. As head of a commando unit under Suharto, who was his father-in-law, Mr Prabowo kidnapped dozens of activists protesting against the regime. After Suharto’s downfall in 1998 Mr Prabowo divorced the ex-dictator’s daughter and owned up to his role in the abductions. He said, however, that he had just been following orders and had released unharmed all those whom he had detained, even though about a dozen activists who had disappeared at the time were never heard from again. A military panel, convened by the reformist government which succeeded Suharto’s, dismissed Mr Prabowo from the armed forces, but he avoided further punishment.

Critics argue that Mr Prabowo wants to take Indonesia back to Suharto’s “New Order”, reversing the democratic reforms of the past 28 years. They point in particular to Mr Prabowo’s long-standing ambition to abolish direct elections for provincial governors, mayors and regents (the chief administrators of Indonesia’s 416 counties), allowing local assemblies to elect local leaders instead. Direct elections, he says, are expensive and lead to corruption. His detractors, however, worry that he wants eventually to eliminate direct elections for president, leaving the job to parliament, as in Suharto’s day. That would allow Mr Prabowo to skate to a second term with a nod from his huge coalition.

Mr Prabowo’s defenders insist that he is not a carbon copy of Suharto. Despite coming of age under the New Order, he has adapted to the rowdy democracy that Indonesia has become, and to the give-and-take that comes with it. After losing two presidential elections to Joko Widodo, his predecessor and bitter rival, he agreed in 2019 to serve as defence minister under Jokowi, as the former president is universally known. When he at last won the presidency in 2024, he did so with Jokowi’s son as his running-mate.

At any rate, Mr Prabowo has shied away from some authoritarian steps in his 18 months in office. When protests against corruption and police brutality paralysed dozens of cities last year, with some rioting and looting, advisers urged him to declare martial law. Mr Prabowo refused, relying instead on civilian law enforcement and the courts. Police arrested thousands of protesters, but later released nearly all of them. And the amendments to the armed-forces law that have caused so much angst among activists were not nearly as far-reaching as many feared. Evan Laksmana of the International Institute for Strategic Studies, a British think-tank, says they were mostly intended to keep the bloated army busy.

Some of Mr Prabowo’s policies are perfectly sensible. Natural-resource concessions have often been handed out or managed corruptly. Reviewing them is a fine idea, as long as it is done impartially. He is also keen to close underperforming SOEs—another long-shirked task.

Optimists argue that Mr Prabowo is driven less by a desire to restore the dictatorship of Suharto than by a quest to redeem his own reputation. In 1998 he was jockeying to succeed his father-in-law as president before his eventual dismissal from the armed forces. He spent years in self-imposed exile in Jordan, licking his wounds, before returning to Indonesia to re-enter politics. His ascent to the presidency crowns a 25-year slog for rehabilitation. He will not want to throw all that away.

Mr Prabowo’s admirers say he has less in common with Suharto than with the man whom Suharto supplanted: Indonesia’s charismatic founding president, Sukarno. Mr Prabowo’s focus on governing not by diktat but by cajoling the elite into a consensus is reminiscent of what Sukarno called “guided democracy”. Mr Prabowo’s cabinet of more than 100 ministers is the biggest since Sukarno’s day and reflects the same intention: to co-opt as many parties as possible. Mr Prabowo even dresses and speaks like the founding father.

It may simply be that Mr Prabowo’s dark past is prompting potential critics to fall in line without any need for Suharto-like coercion. Indonesia had already become a less liberal place under Jokowi. Although his cheery demeanour made him seem more democratic, his administration eroded checks and balances, allowed corruption to flourish and politicised law enforcement. An acid attack in 2017 on an official from an anti-corruption agency at the hands of two police officers bore similarities to the attack against Mr Andrie.

Whatever Mr Prabowo’s intentions, dangers loom. One is that fiscal profligacy further undermines confidence among foreign investors. As it is, they have gradually been withdrawing capital throughout Mr Prabowo’s tenure (see chart). Mr Prabowo’s tirades against local tycoons might also backfire, prompting them to stash their cash in Singapore rather than invest. The rupiah has sunk by 11% against the dollar during his time in office, to a record low. A credit downgrade would push up borrowing costs and pull the rupiah down further. That could instigate a downward spiral of the sort that ultimately cost Suharto the presidency.

Another risk is that stifled opposition finds an outlet on the streets. Last August’s riots began when an armoured police van killed a food-delivery motorcyclist weaving his way through a protest against corruption. As in 1998, the unrest was fuelled by lay-offs, inflation and other economic woes. Mr Prabowo’s attempt to butter up his American counterpart, Donald Trump, by offering to send 8,000 peacekeepers to Gaza also risks alienating a public that is staunchly pro-Palestinian. (Mr Prabowo says the deployment is on hold.) Mr Prabowo’s government is storing up problems that both Sukarno and Suharto would have struggled to contain. ■