December 30, 2025
JAKARTA – Indonesia looks back at a year marked by intertwined internal and external developments that together created a turbulent economic environment the government struggled to navigate while maintaining both sustainable growth and fiscal stability.
Aside from lower prices of some key Indonesian export commodities, the external pressure originated from the United States, where President Donald Trump, soon after assuming office in January, upended global trade with a salvo of import tariffs aimed at reindustrializing America.
Push and pull tactics employed by the US government caused uncertainty over what might happen next, leaving businesspeople on tenterhooks and many investment decisions in limbo.
The dust eventually settled and the wheels began to turn again, but the protracted uncertainty hurt global trade flows and gross domestic product growth.
In Indonesia, trade activity slowed down as tariff uncertainty peaked in earlier in the year but eventually rebounded and exceeded expectations as exporters tried to get US-bound shipments out before the tariffs diminish access to the world’s largest consumer market.
The trade disruption, which began with the US president announcing the so-called ‘reciprocal’ tariffs in early April, could not have come at a worse time for Indonesia, since the government had just undertaken a mammoth fiscal shift weeks earlier, cutting many spending items to free up a large sum for President Prabowo Subianto’s flagship free meals program.
The fiscal overhaul froze more than 7 percent of the entire year’s budget, a large amount of the planned spending was paused, and some businesses lost cues for investment they had inferred from the original 2025 State Budget Law.
Andalas University economist Syafruddin Karimi told The Jakarta Post on Dec. 11 that the move had hampered growth in the first half of the year as government institutions postponed project execution, tenders and “labor-intensive programs that could’ve injected demand into the real economy”.
“A budget reallocation to flagship political programs without strict evaluation on their economic benefits could potentially shift spending from productive activities with a high multiplier effect to spending that is more heavily orientated toward public perceptions, and thus, the growth quality declined even though the headline GDP [growth figure] was maintained,” said Syafruddin.
Whether the reallocation results in a high multiplier effect remains to be seen, but we will not find out until the program that aims to feed more than 82 million Indonesians reaches full scale, with the entire budgeted amount spent, which has not happened so far.
Struggling to spend the large additional funds earmarked to the program, the government in the third quarter reinstated the original, lower, budget allocation, raising uncomfortable questions about the need for the severe budget cuts made earlier in the year, which economists say have hampered economic activity.
A week of violent nationwide protests at the end of August eclipsed mass demonstrations and rioting seen in 2019, tainting Indonesia’s image as a politically stable country and prompting foreign investors to withdraw portfolio capital.
Syafruddin said the demonstrations, which spread from Jakarta to many cities, disrupted transportation and were accompanied by violence and vandalism, “created negative sentiment in the money market, increased risk perception and triggered concerns that economic reform would be dragged down by short-term political compromise”.
After the protest, Prabowo reshuffled his cabinet, with the most notable change for financial markets being the departure of Sri Mulyani, one of the longest-serving finance ministers and a figure credited for Indonesia’s solid economic performance.
Her successor Purbaya Yudhi Sadewa was a relatively unfamiliar figure but soon made a name for himself with striking statements catching media attention.
Economist Intelligence Unit analyst Tay Qi Hang told the Post on Dec. 11 that the protests and subsequent cabinet reshuffle had “generated short-lived uncertainty, particularly around fiscal continuity and investor sentiment”.
“However, Indonesia’s institutional framework and adherence to the deficit rule helped anchor expectations, limiting any sustained market or economic impact,” Tay added, referring to the fiscal deficit limit set at 3 percent of GDP under a 2003 law.
The budget deficit would exceed the legal limit by reaching 3.1 percent of GDP this year, the analyst predicted, due to weak revenue prospects and accelerated spending in the second half as government institutions catch up on delayed disbursements.
The handover from Sri Mulyani to Purbaya initiated a shift from a pro-stability stance to a pro-growth fiscal policy, Permata Bank chief economist Josua Pardede told the Post on Dec. 11.
Josua argued that balancing growth and stability “has become ever more important now” to maintain a sustainable growth path. He predicted the year to close with a deficit safely below the limit, namely at 2.75 percent of GDP.
Purbaya told reporters on Dec. 8 that central government institutions had “spent the money better at the end of the year, so we hope that the push to the economy will be significant”, but admitted that tax revenue would miss the target.
GDP growth was weak in the year’s first quarter at just 4.87 percent year-on-year but rebounded to 5.12 percent yoy in the second, before weakening slightly to 5.04 in the third, a rate in line with Indonesia’s experience over the past decade or two.
The government attributed second-quarter acceleration to fiscal stimulus spending and resorted to the same strategy for the rest of the year to maintain household spending as a key driver of economic activity in the country.