Subianto's Struggle Since Becoming President

Indonesia’s new president, Prabowo Subianto, has jumped right into one of the country’s toughest financial issues: state-owned enterprises (SOEs) drowning in debt.

These companies, which include everything from national airlines to major construction firms, collectively owe around $186 billion. This hefty debt pile comes after a big infrastructure push by former president Joko Widodo, who spent nearly $800 billion on projects that left many SOEs in financial strain.

Now, Prabowo faces the challenge of fixing these balance sheets while navigating rising borrowing costs and deciding how much the government should still control in the economy.

One option for Prabowo is to continue relying on state firms to drive priority projects, a tactic his predecessor often used. Some companies, like PT Waskita Karya and PT Wijaya Karya, have had to restructure billions of dollars in debt since 2023. Others, such as the state-owned pharmaceutical PT Indofarma, have struggled with issues like fraud, leaving them unable to pay their employees.

This tough financial environment has raised concerns for investors, pushing borrowing costs for SOEs to increase as confidence in their stability has weakened.

Adding to the pressure, fewer state firms are issuing bonds in local markets due to low investor confidence, which has dwindled since Jokowi’s second term.

Bond spreads for state-owned builders are higher than those for private companies, highlighting growing investor hesitation. This has left state firms more dependent on loans from SOE banks, putting added strain on their financial resources.

Prabowo has set an ambitious goal of 8% economic growth, a target that depends heavily on these debt-laden state companies. To help them improve their finances, the government is considering solutions like capital injections, merging weaker companies, and asking SOEs to focus on specialized areas to avoid internal competition.

These strategies, still in discussion, aim to restore confidence in SOEs and give them the financial stability needed to support Indonesia’s growth plans.

However, if the debt problem isn’t resolved soon, it could impact Indonesia’s broader economy. With state firms crowding out funding sources, private companies could struggle to access financing, potentially scaring off foreign investors.

According to Alessandro Gazzini from Alvarez & Marsal, the long-term impact could be substantial, with unproductive companies increasing their hold on the economy, reducing job creation, and limiting real economic progress.