Lessons from President Lula

There are similarities between the political journeys of Brazilian President Luiz Inácio Lula da Silva and Indonesian President Prabowo Subianto. Both were elected after their fourth attempt at the presidency. Lula previously lost elections in 1989, 1994, and 1998. Similarly, Prabowo entered the national political stage as a vice presidential candidate in 2009, before running for president in 2014 and 2019. Lula was elected with anti-market rhetoric. His narrative worried global investors, particularly regarding the possibility of renegotiating Brazil’s US$90 billion government debt. Lula’s economic development strategy was popularly known as ‘Lulisme’. He declared a ‘social liberal’ approach, combining capitalism with social welfare programmes for workers and the lower middle class. At the start of Lula’s term in 2003, the Brazilian government financed massive social welfare programmes. The country became trapped by weak fiscal discipline, marked by a high debt-to-GDP ratio exceeding 60% and a fiscal deficit-to-GDP ratio above 3%. Furthermore, early in Lula’s administration, the primary balance was negative and credit default swaps rose, reflecting an increased risk of default. Consequently, Brazil’s country risk premium increased significantly. This led to higher borrowing costs, with domestic and foreign debt interest rates rising, government bond yields increasing, and bond prices falling. The situation was worsened by tax revenues, reflected in the tax ratio, not meeting expectations. This forced the Brazilian central bank to cover the high fiscal deficit through money creation. Global rating agencies such as Moody’s, Fitch Ratings, and Standard & Poor downgraded Brazil’s debt rating to ‘highly speculative’. The government’s CDS reached an all-time high of 3.75. This condition caused the Brazilian real exchange rate to depreciate extremely. The Bovespa stock index also experienced a drastic decline, leading to the worst-case scenario: a government debt default. Prabowo’s economic narrative is somewhat similar to Lula’s, namely state capitalism, which is neither socialism nor pure capitalism. Prabowonomics seeks to take positive aspects from both systems. At the start of his administration, Prabowo spent large amounts of the state budget on social programmes, such as the Free Nutritious Meals programme and the pro-people village cooperative and people’s school initiatives. As a result, the fiscal deficit-to-GDP ratio increased from 2.29% in 2024 to 2.92% in 2025. This has narrowed the government’s fiscal space amidst global economic uncertainty due to the Middle East conflict. What is most worrying is that Indonesia’s debt service ratio has risen to nearly 50%. This means almost half of state revenue is used to pay debt. The ‘state capitalism’ narrative, which prioritises the government’s role, has generated negative sentiment among global investors. This is reflected in the outlook for Indonesia’s government debt being downgraded from stable to negative. Consequently, Indonesia’s country risk premium rose to 2.46, higher than Malaysia’s 1.55 and Thailand’s 2.07. The potential for a government debt default has also increased, with Indonesia’s CDS reaching 1.05, higher than Malaysia’s 0.53. The high country risk premium has caused a net foreign capital outflow from Indonesia, putting pressure on the rupiah exchange rate against the US dollar and the Jakarta Composite Index. The rupiah exchange rate hit its worst record since the 1998 Reformation. According to The Japan Times, three major global banks, Citigroup, Standard Chartered, and HSBC, have withdrawn around 11.5 trillion rupiah of their funds over the last two years. Similarly, foreign ownership of government securities has fallen from 41% in 2018 to only about 13% in 2025, a drop of 28% over seven years. So, what can Prabowo do? The first step is to maintain fiscal discipline, reflected in a fiscal deficit-to-GDP ratio of no more than 2.5%, by relaxing some populist programmes. The second step is to gradually reduce the debt service ratio to around 30% from its current level near 50%, and to improve tax revenue realisation, reflected in a tax-to-GDP ratio of around 13%. The third step is to reduce the perceived risk of the national economy by adopting a pro-market ‘state capitalism’ narrative, reducing the anti-market rhetoric in Prabowonomics that prioritises the state’s role.