Will Indonesia breach its budget deficit limit?

The recent rise in public spending and fall in revenues has sent the Indonesian government’s budget deficit veering towards the constitutional 3% of GDP limit. And it’s unclear how the president-elect will be able to enact his ambitious welfare plans without breaching the fiscal rules. Our sense is that the plans will be watered down and that there’ll be fiscal tightening in other areas. But it’s clear that Indonesia’s fiscal rules are under growing threat. Running a larger deficit wouldn’t trigger a fiscal crisis, but it would send a worrying signal to investors of more populist policymaking and could cause credit spreads to widen.