Photo Credit: money.kompas.com

Indonesia's new government under President Prabowo Subianto is charting an intriguing economic path, marked by a strategic blend of technocratic expertise and political pragmatism. At the heart of this approach is the return of Sri Mulyani as finance minister, a move that signals a commitment to fiscal sustainability and economic prudence.

Sri Mulyani brings significant experience to the role, offering reassurance to international investors and providing stability during a challenging economic period. However, her tenure is not without challenges. Indonesia continues to struggle with a low tax ratio of around 10% and has not yet returned to pre-Asian financial crisis growth levels, presenting significant hurdles for the new administration.

To address these complex economic challenges, Prabowo has assembled a formidable economic advisory team. The newly created National Economic Council (Dewan Ekonomi Nasional), led by Luhut Binsar Panjaitan, includes prominent economists like Mari Elka Pangestu, Chatib Basri, and Arief Anshory Yusuf. This team represents a departure from previous advisory bodies, aiming to provide more comprehensive macroeconomic insights.

The economic landscape facing this team is particularly challenging. By the third quarter of 2024, Indonesia's economic growth had reached only 5.03%, with projections suggesting stagnation around 5 to 5.1% in 2024 and 2025. This falls significantly short of Prabowo's ambitious 8% growth target, compounded by declining consumer purchasing power and persistent economic pressures.

One notable economic strategy emerging is a nuanced approach to taxation. The government plans to increase the value-added tax (VAT) to 12% in 2025, but with a crucial caveat - the higher rate will primarily apply to luxury goods. Essential items like basic foodstuffs, public transportation, education, healthcare, and products from small businesses will remain exempt. This approach reflects an attempt to balance revenue generation with protecting consumer interests.

The automotive sector has already begun responding to these potential changes. Manufacturers like Hyundai and Astra Honda Motor are preparing for potential market challenges, with Hyundai predicting a potential 8% decline in four-wheeled vehicle sales and exploring strategies like introducing hybrid models to maintain consumer interest.

Interestingly, Prabowo's economic team represents a fascinating ideological blend. Despite his historical inclination towards protectionist and self-sufficiency rhetoric, he has embraced Western-educated economists, suggesting a willingness to balance nationalist sentiments with technocratic insights. This approach draws parallels with the New Order era, where leaders like Soeharto relied on economic experts to navigate complex economic landscapes.

The effectiveness of this approach remains to be seen. While the advisory team includes impressive intellectual firepower, they face significant structural limitations. Each advisor has minimal staffing support, and their influence will depend on how effectively they can translate expertise into actionable policy.

As Indonesia confronts economic uncertainties, Prabowo's economic team represents a calculated attempt to blend political vision with technical expertise. Their success will be crucial in determining whether Indonesia can overcome its structural economic challenges and move towards the ambitious growth targets set by the new administration.
 

Sources: 

https://indonesiaatmelbourne.unimelb.edu.au/return-of-the-technocrats-can-prabowos-economic-team-prove-the-doubters-wrong/ 

https://jakartaglobe.id/business/basic-commodities-healthcare-and-education-exempt-from-vat 

https://jakartaglobe.id/business/prabowo-vat-hike-to-focus-exclusively-on-luxury-goods 

https://jakartaglobe.id/news/automotive-sales-at-risk-as-government-plans-12-vat-in-2025 

https://chinaglobalsouth.com/analysis/indonesias-south-china-sea-strategy-pragmatism-or-concession/ 

https://asiatoday.id/read/south-china-sea-controversy-this-is-president-prabowos-attitude