Prabowo Bends to the Will of the Markets

TEMPO.CO, Jakarta - Indonesian President Prabowo Subianto has finally been forced to compromise. He could not indefinitely pursue policies that ran counter to the judgment of financial markets. Without a change of course, his government risked becoming trapped in an increasingly severe funding squeeze. That compromise was evident in his state address and presentation of the 2027 draft budget on August 14.

At least two concessions stood out. The first concerned the independence of Bank Indonesia. Prabowo made no mention of bringing the central bank into the cabinet structure, as markets had feared following Perry Warjiyo’s resignation as BI governor in late July. Formally, at least, BI remains independent rather than subordinate to the president in setting monetary policy.

For investors, BI independence is a crucial test of Indonesia’s credibility. It provides some assurance that monetary policy will remain focused on inflation and currency stability, rather than being bent to a president’s short-term desire for faster growth, whatever the consequences. Without that independence, there would always be a risk that BI might be pressed into financing the government’s budget deficit by creating money. This was the market’s gravest concern.

The second concession involved Danantara Sumberdaya Indonesia (DSI). Prabowo abandoned the plan to centralize exports of natural resource commodities through the company. “I repeat: it is the processing, not that a single company will control the commodities and export them. No,” he said. DSI will therefore serve only as a processing and verification centre, rather than as a trader or sole exporter.