High Economic Growth Requires Greater State Capacity
Chief Economist Fakhrul Fulvian emphasises that the government’s target for high economic growth under the 2027 Macroeconomic Framework and Fiscal Policy Principles (KEM-PPKF) can only be achieved if Indonesia expands its state capacity. This includes fiscal space, financing, and economic stability. He argued that sustainable growth cannot be sustained solely by domestic consumption or commodity booms; it requires a stronger fiscal space and a national funding structure capable of supporting long-term downstream, industrialisation.
‘High economic growth cannot rely solely on consumption or commodity booms. Therefore, the state’s capacity must grow,’ Fakhrul said in a statement to Media Indonesia on 20 May.
He explained that state capacity is not measured only by the size of the state budget (APBN) but also the government’s ability to maintain market confidence, strengthen external stability, and create long-term funding sources to underpin the downstream and industrialisation agenda.
He noted that the downstream, industrialisation, and efforts to enlarge the middle class require fiscal space and a much stronger funding structure than today.
Fakhrul assessed that Indonesia’s government revenue to GDP ratio remains around 11%, indicating substantial room to strengthen national fiscal capacity compared with many other emerging market countries. However, he stressed that strengthening state capacity should not be done merely through raising tariffs or new levies.
‘The main focus should be on improving tax compliance, expanding the formal economy, digitalising administration, and, most importantly, maintaining confidence in the government’s policy direction,’ he said.
The government has set its macroeconomic base assumptions for 2027 as the foundation for drafting the next year’s APBN. In the projection, growth is expected to be between 5.8% and 6.5%, with inflation projected at 1.5% to 3.5%. Meanwhile, the 10-year Indonesian Government Securities yield is projected to be between 6.5% and 7.3%.
The rupiah is forecast to move within Rp16,800 to Rp17,500 per US dollar, while Indonesia’s crude oil price is pegged at US$70 to US$95 per barrel.
He also highlighted the imbalance between a large trade surplus and ongoing net outflows in the financial balance, indicating Indonesia remains vulnerable to the global dollar cycle.
‘This shows Indonesia is still too vulnerable to the global dollar cycle. We have a large trade surplus, but when the dollar strengthens, pressure still comes to the domestic financial market. This means our balance of payments structure must be strengthened,’ Fakhrul said.
He argued that the high-growth target can only be achieved if Indonesia builds a more resilient financial architecture against external shocks. There are three main strategies to accelerate this:
‘First, deepen the domestic derivatives market so firms and investors have better hedging instruments against global risk,’ he said.
‘Second, internationalise the rupiah gradually and realistically, especially through expanding local currency settlement in the regional area,’ he added.
‘Third, broaden non-dollar funding sources through RMB-denominated bonds, by both the government and the private sector. The world is moving toward a more multipolar financial system, so Indonesia should begin leveraging global non-dollar liquidity to make national funding structures more resilient and less reliant on the dollar cycle.’
In addition, he argued that Indonesia needs to build a long-term rupiah-based financing environment to strengthen domestic funding capacity. This can be achieved by strengthening long-term domestic investors, particularly from non-bank financial institutions such as pension funds, insurance companies, asset managers, and sovereign funds.
He says long-term domestic investors are crucial because downstream industrialisation requires long-term rupiah funding.
‘We need stronger long-term domestic investors, especially from non-bank financial institutions such as pension funds, insurance, asset managers, and sovereign funds. Because downstream and industrialisation require long-term funding in rupiah,’ he said.
Fakhrul emphasised that Indonesia’s biggest challenge going forward is not only pursuing high growth but ensuring that the country has a robust enough funding foundation to support the transformation.
‘High-growth targets can only be achieved if the state’s capacity also rises. And state capacity is ultimately determined by two things: the ability to build trust and the ability to secure stable funding,’ he concluded.