(Bloomberg) — Indonesia’s rupiah slumped nearly 1% after President Prabowo Subianto’s surprise decision to scale back a tax hike, prompting the finance minister to talk down concerns over the country’s fiscal health.
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After second-half revenues recovered, the 2024 budget deficit will likely come in much lower than the official estimate, Finance Minister Sri Mulyani Indrawati said on Thursday at a ceremony marking the first stock trading of 2025. That’s despite increased state spending last year.
“This is an extraordinary result — smaller, much smaller, than the first-half report in which we predicted the deficit would close at 2.7%” of gross domestic product, she said. “This means that our state budget will close in 2024 relatively healthy and safe, which will be a strong position for 2025.”
The comments were her first since Prabowo shocked markets with his New Year’s Eve decision to pare back a value-added tax hike from 11% to 12%, with the higher levy now only applying to luxury items like private jets and yachts. The rupiah fell close to 1% to 16,259 against the dollar, before trading at 16,230 at noontime in Jakarta.
“While the government’s decision to cancel the VAT hike is positive for GDP growth and inflation, it makes the government look inconsistent and imprudent to investors,” said Lionel Priyadi, a macro strategist at PT Mega Capital Indonesia. “Investors are now pricing in regulatory uncertainty and greater fiscal risks.”
The rupiah was by far the biggest loser on Thursday among the most-actively traded Asian currencies. Yields on Indonesia’s 5- and 10-year papers were mostly unchanged.
While an across-the-board VAT hike had been expected to raise roughly 75 trillion rupiah ($4.6 billion), the watered-down increase will likely bring in only 3.2 trillion rupiah in state revenues, Mukhamad Misbakhun, who chairs the parliamentary commission overseeing financial affairs, said in a statement on Wednesday.
“This is a difficult choice that President Prabowo’s government must make for the sake of supporting purchasing power,” Misbakhun said.
Prabowo’s decision came after economic growth dipped to a one-year low in the third quarter as Indonesia struggled with weak consumption and a spate of job layoffs in the manufacturing sector.
In a sign of waning spending, headline inflation stood at a record-low 1.57% for full-year 2024. Business and labor groups had warned that a VAT hike could further sap momentum from Southeast Asia’s largest economy.
