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[JAKARTA] Indonesia is preparing its third stimulus package this year in a bid to keep the economy growing near the 5 per cent mark, but with details under wraps and key subsidies to be excluded, economists are warning that the measures may be too modest to counter mounting domestic and global pressures.

Radhika Rao, senior economist at DBS, said: “The relatively narrower scope of stimulus support is likely to translate into a marginal impact on growth.

“While the extension of selected incentives may help demand, especially for lower-income households, the absence of wage subsidies and the persistent global uncertainty could keep growth below 5 per cent in the second half.”

Her comments followed the quarterly meeting of Indonesia’s Financial System Stability Committee, during which policymakers signalled a unified effort to sustain economic momentum amid signs of weakening household consumption, slowing manufacturing activity, and the growing global trade risks from the US’ tariffs.

The committee, which includes the finance minister, central bank governor, financial services authority and deposit insurance agency, announced on Monday (July 28) that the government is preparing a third stimulus package aimed at boosting regional economies, domestic tourism and transportation ahead of the year-end holidays. The full details will be unveiled later by the Coordinating Ministry for Economic Affairs.

This follows a US$1.5 billion package rolled out in June, which included discounts on road tolls, top-ups to social assistance, and wage subsidies to lift second-quarter growth.

Finance Minister Sri Mulyani Indrawati said the government is making efforts to keep Indonesia’s gross domestic product growth at around 5 per cent this year.

Indonesia has long struggled to break out of the so-called 5 per cent growth trap. Despite averaging around 5 per cent annual GDP growth over the past two decades – a rate outpacing that of its regional peers – Indonesia’s economy remains stuck in second gear, struggling to get into the fast lane towards high-income status, and to break free of the middle-income trap.

The economy grew 4.87 per cent in Q1 2025, the slowest first-quarter pace in over three years.

Indonesia, which has actively courted foreign investment in downstreaming industries, saw a sharp slowdown in realised inflows in the second quarter of this year. Foreign direct investment fell 6.95 per cent year on year to 202.2 trillion rupiah (S$15.8 billion), the steepest decline in five years.

Rosan Roeslani, Minister of Investment and Downstreaming, said the economy is facing growing competition for foreign investment amid rising geopolitical tensions and shifting global trade dynamics, particularly in the wake of US President Donald Trump’s tariff policies.

“At the same time, we’re also seeing US companies looking to repatriate their investments back home,” he said on Tuesday (Jul 29).

As the second half of the year unfolds, policymakers are treading a fine line, providing just enough support to boost demand, even as they keep an eye on long-term fiscal stability.

With the budget deficit projected to widen to 662 trillion rupiah this year, President Prabowo Subianto is doubling down on an ambitious goal to push economic growth to 8 per cent in the coming years.

He is banking on flagship programmes such as the provision of free school meals and the construction of 3 million homes a year to drive demand and lift the economy.

The 73-year-old leader has pulled out all the stops to boost property sales and widen access to home ownership in Indonesia. A key measure in this drive is the extension of a property tax break for homes priced up to 2 billion rupiah, now set to run till year’s end.

Joko Suranto, who chairs Real Estate Indonesia, a property developers’ association, welcomed the extended property tax break, saying it would ease the burden on homebuyers and support the sluggish market. He noted sales have improved slightly, but demand is still weighed down by weaker purchasing power, lay-offs and uncertainty.

But not all stimulus measures are continuing. The government ends its wage-subsidy programme from August, in a move that could blunt support for low-income households. The subsidy, which began in June, was targeted at labour-intensive sector workers earning under 3.5 million rupiah per month.

Rao from DBS said that ending this programme could blunt the overall effect of the stimulus measures: “The absence of wage subsidies might lower the extent of material lift in consumption,” she said, and added that inflation remains within target and market conditions are stable enough to allow further monetary easing if needed.

In a Jul 28 report, DBS projected that Indonesia’s economic growth would ease to 4.8 per cent in the second quarter, and 4.7 per cent in the third, citing weaker consumer confidence, slower credit growth and lower government spending as key drags on the momentum. DBS forecasts Indonesia’s full-year GDP growth to ease to 4.8 per cent in 2025, down from 5 per cent in 2024.

Lowering rates isn’t enough

Bank Indonesia (BI), which has been willing to cut interest rates further, is expected to take on a bigger role in boosting demand. Governor Perry Warjiyo said the central bank would “play it by ear” and adjust the size and timing of future rate cuts based on global and domestic conditions.

The bank also signalled plans to further scale back the issuance and yields of its rupiah-denominated securities, aiming to boost liquidity and support economic growth. The central bank cut rates again in July, bringing this year’s cuts to 75 basis points.

But economists argue that monetary tools alone will not be enough to revive investment or drive lasting growth.

The Institute for Development of Economics and Finance (Indef) projects that the US’ decision to impose a 19 per cent import tariff on Indonesian products would have knock-on effects, prompting factories to tighten operations and, ultimately, erode consumer purchasing power.

Rizal Taufikurahman, head of Indef’s Center for Macroeconomics and Finance, suggested that the government offer fiscal incentives to export-oriented sectors in the form of, for example, tax allowances for labour-intensive industries and those hit by the US tariffs.

Wijayanto Samirin, a senior economist at Paramadina University, said he deemed the overall stimulus approach too limited to make a real difference: “This stimulus package is very minimal. Its impact on boosting purchasing power and growth will be minimal too.”

He pointed out that simpler and more effective tools, such as electricity bill discounts, have been left out, likely due to fiscal constraints and state utility PLN’s cash-flow challenges. “These would have had a stronger and more direct effect on household spending.”

Indonesia rolled out electricity bill subsidies worth 13.6 trillion rupiah in the first two months of this year, ahead of a planned VAT hike to 12 per cent.

However, the programme was discontinued in March because the government decided to postpone the tax increase.

Wijayanto supports further interest rate cuts by BI, arguing that in the current environment, growth and job creation should take precedence over exchange-rate stability.

Still, he warned that Indonesia faces deeper structural issues that limit the effectiveness of stimulus measures. “We have unresolved problems that are holding back investment, namely complex and inconsistent regulations, high logistics costs and worsening legal uncertainty.”

Indonesia is also considering measures such as directing state-owned banks to issue loans to village cooperatives using Village Funds as collateral, and allocating 130 trillion rupiah in subsidised housing credit.

However, Wijayanto warned that such risky proposals could undermine fiscal discipline, threaten financial stability and fuel a potential property bubble.

“We must be cautious,” he said. “Property bubbles have triggered some of the world’s worst financial crises, including the Asian crisis in 1998.”