Danantara: Indonesia's Ticking Financial Time Bomb

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At the same time, the rupiah depreciated by 2% against the US dollar, signaling growing fears of capital outflows. For foreign investors, Danantara-once seen as a bold move-now looks like a ticking financial time bomb.

The heart of Indonesia's gathering financial instability is Prabowo's populist spending agenda. His government has promised ambitious social programs, including a US$28 billion free meal initiative for schoolchildren.

While noble in intention, this program-coupled with Danantara's massive budgetary demands-has created what is being viewed as an unsustainable fiscal burden.

Indonesia has long prided itself on maintaining a budget deficit below 3% of GDP. Prabowo's administration insists it will cap the deficit at 2.53%, but financial analysts and investors are unconvinced.

When a government cuts essential services while expanding politically driven spending, the numbers stop adding up. Yet, Prabowo's government remains in denial, doubling down on its fiscal strategy instead of correcting course.

No transparency, no oversight

One of the biggest concerns surrounding Danantara is its lack of transparency and accountability. Unlike Temasek or Khazanah, which are governed by independent boards and rigorous oversight, Danantara is under Prabowo's direct presidential control.

This structure has spooked investors, who fear that the fund could become a tool for political patronage rather than clear-eyed economic stimulus. Worse, Indonesia's national auditors have been excluded from Danantara's oversight, raising concerns that billions could be mismanaged or worse.

When the foundation of an economic institution is built on secrecy rather than trust, it does not take long for cracks to appear. And as capital exits Indonesia, the rupiah is increasingly vulnerable to external shocks. A depreciating currency means higher import costs, rising inflation and greater difficulty in servicing foreign debt.

If the trend continues, Indonesia could face a full-scale currency crisis-a scenario eerily reminiscent of the 1997-98 Asian financial crisis, when the rupiah collapsed, inflation skyrocketed and the country was eventually forced into an IMF bailout.

The difference today is that Indonesia's economy is more diversified and its banks are stronger. But no economy-no matter how resilient-can withstand reckless fiscal policies and investor panic indefinitely.

Leading economists and scholars have voiced their apprehensions regarding Prabowo's economic strategies.

Dr Chatib Basri, a former Indonesian finance minister and respected economist, has highlighted that with limited fiscal space and high market interest rates for government bonds, structural reforms are essential to achieve Indonesia's highly ambitious 8% GDP growth target.

Furthermore, analysts have drawn parallels between Danantara and other sovereign wealth funds, cautioning that without proper governance, Indonesia risks creating an institution that could become a liability rather than an asset.

Finance Minister Sri Mulyani Indrawati, a stalwart of fiscal prudence, is clearly at odds with Prabowo's expansive policies.

Despite her efforts to maintain a budget deficit below 3% of GDP, the administration's spending plans are straining the nation's finances. Speculation about her potential resignation has further unsettled investors.

Running out of time

The question is whether Indonesia is fast running out of time. If Prabowo wants to avert a financial catastrophe, his government would be wise to take four immediate measures.

First and foremost, restore investor confidence. Prabowo must quickly reassure markets that Danantara has independent oversight. That would entail quickly allowing national auditors to scrutinize the fund's management and report on their findings.