Recent changes in Indonesia are remarkable. In October 2024, a figure named Prabowo will be inaugurated as president. He comes from a prominent family; his father was an economist who studied in the Netherlands and served as a minister in several government departments such as the Ministry of Industry and Trade, the Ministry of Finance, and the Ministry of Science and Technology. With a background in a traditional conglomerate, he has secured a strong political foundation within Indonesia.
After graduating from the military academy, Prabowo served in special forces and gained fame for his combat achievements. He solidified his position in the military by killing the second president of East Timor, and this experience made him a more notable figure. His family background and aggressive nature were positively viewed by Indonesia's former president Suharto, and by marrying Suharto's second daughter, he expanded his power as a son-in-law.
Indonesia has a past where Suharto held onto power for 32 years from 1966 under a dictatorial regime. Prabowo played a role in suppressing military officials or politicians who opposed his father-in-law's dictatorship from key military positions, and his influence during that time was quite powerful.
Moreover, at the end of 1997, hedge funds attacked Indonesia and other Southeast Asian countries. This event was related to the currency crisis experienced by several countries, including Korea, and during this process, Prabowo further solidified his position amid rising tensions. More detailed information regarding this can be found in a separate link.
These changes are expected to significantly alter Indonesia's political environment, and future developments are being closely watched.
Indonesia faced a currency crisis, having been unable to effectively counter the hedge fund attacks. Consequently, the exchange rate surged by five times, and the economic growth rate plummeted to a severe level of -13%.
As the economic situation worsened, the citizens lost trust in the dictatorial regime. Ultimately, this distrust led to large-scale protests, and the government faced significant pressure. These events further intensified Indonesia's political and economic instability.
During Suharto's regime, Prabowo, who was a high-ranking official, participated in activities closely related to human rights violations to suppress anti-government protests as they intensified. He kidnapped and detained 22 democratization activists demanding an end to the dictatorship, and among them, 13 still remain missing. When four students died during the military's suppression of protests, the streets of Jakarta became filled with anger, leading to Suharto's resignation on May 21, 1998.
After Suharto's resignation, Prabowo divorced Suharto's second daughter and went into exile in Jordan. During the exile period, he started a new life as an entrepreneur, utilizing his wealth and network. After three years in exile, Prabowo returned to Indonesia, running 27 companies and re-entering politics. His political standing was sometimes difficult due to his past image as the son-in-law of a dictator.
To improve this negative image, he supported a progressive candidate named Joko Widodo. Widodo, through his activities as the governor of Jakarta, gained public support and emerged as a presidential candidate, leading to a conflict between the two. In the 2014 presidential election, Prabowo garnered 46.8% of the support but regrettably lost to Widodo, becoming the runner-up. Indonesia's political ecosystem features a complex structure where 11 minor parties compete.
In the 2019 election, Widodo collaborated with four progressive parties, while Prabowo allied with seven conservative parties. As a result, Prabowo received 44.5% of the support again losing to Widodo. In forming the new cabinet, to secure support from conservative parties, Widodo appointed Prabowo as Minister of Defense.
While fulfilling his duties as Minister of Defense, Prabowo planned his move as an opposition candidate for the 2024 presidential election. He put the KF-21 fighter jet joint development project signed by Widodo on hold and sought alternative measures to strengthen military capability. Indonesia aimed to secure fighter development technology through joint development of the KF-21 and to introduce 48 fighters.
In the end, Indonesia signed a contract worth 1.7 trillion won and secured a development technology and one prototype. However, Prabowo shifted his policy towards purchasing fighter jets rather than domestic production of the KF-21 and suspended the scheduled payments for development contributions due to Korea. He sought to acquire fighter manufacturing technology from Korea while pushing for the introduction of Russia’s SU-35 and France’s Rafale fighter jets, changing direction.
Against this backdrop, the continuous delay in payments for Indonesia's KF-21 is mainly influenced by Prabowo's intention to exert political influence in preparation for the next presidential election. A new presidential election is scheduled in Indonesia on February 14, 2024.
Prabowo chose to cooperate with President Joko Widodo as he ran for the third presidential election. In the process, he decided to nominate President Joko's son as the vice presidential candidate. Currently, President Joko's approval rating is very high, reaching 70%, which allowed Prabowo to be successfully elected president with a 58% support rate.
However, this process faced criticism from progressive intellectuals for selecting Joko Widodo's eldest son as the vice presidential candidate. Indonesian election regulations require that presidential and vice-presidential candidates must be over 40 years old. However, Given, the son of President Joko, is in his 30s and does not meet this requirement.
In October 2023, Indonesia's Constitutional Court ruled that local government heads are not subject to age restrictions once elected. This ruling applies to cases like Given's, as he was serving as the mayor of Surakarta, thus paving the way for him to run as a vice presidential candidate. This ruling sparked controversy, and the president's wife’s brother, who is the president of the Constitutional Court, played a significant role in passing the resolution with a vote of 5 to 4.
In addition to these political issues, Indonesia is facing a serious problem of the sinking capital. Jakarta, the current capital, is continuously sinking, leading to the expansion of areas below sea level. This situation is expected to significantly impact Indonesia's economy and society.
North Jakarta is sinking rapidly at a rate of 25cm per year, having dropped over 2.5 meters in the past decade. At this rate of sinking, by 2030, the Indonesian presidential palace is expected to be submerged below sea level. This situation is further aggravating regional environmental issues.
Indonesia has decided to relocate the capital. This decision is part of an effort to address national development and urban overcrowding. Thus, there is much anticipation about what the new capital will look like.
The reason Jakarta is sinking is not directly related to climate change. In the early 1900s, when the population was only 110,000, it was designated as the capital of Indonesia, leading to a rapid increase to over 10 million inhabitants. This city is situated in a swamp where 13 rivers converge, consisting of naturally soft land. However, the water supply coverage is only 60%, so residents began to dig wells to use groundwater as drinking water when the supply was insufficient.
This extraction of groundwater has caused problems. As space for groundwater is increasingly emptied, the ground has begun to sink. Generally, extracting groundwater is naturally replenished by rainfall, but Jakarta has undergone severe urbanization, becoming covered in asphalt and concrete. This has led to rainwater being unable to permeate the ground, while over 4 million people have become reliant on groundwater, causing the land to be unable to bear the burden.
Furthermore, as the use of groundwater diminishes, seawater has begun to intrude, leading to salinity issues. Because of these circumstances, the Indonesian government has ultimately decided to relocate the capital to Nusantara on Borneo Island. This can be seen as a long-term solution to Jakarta’s flooding problem.
The ongoing first-phase construction is proceeding with a total budget of $32.7 billion, including space for the presidential palace and residence for 500,000 civil servants. This construction is merely a precursor to the second and third phases, which will extend from 2025 to 2045. As part of the large-scale capital relocation project over the next 20 years, Nusantara's area is said to be 4.2 times that of Seoul, modeled after Korea’s Sejong City.
Korean construction companies are showing great interest in the development of the new city, but this project was initiated by the former president, thus the current president Prabowo's position is being closely scrutinized. However, the biggest issue with this project is funding. The government will cover 20% of the total budget, while the remaining 80% is planned to be funded by private capital, but both sources of funding are not readily available.
Prabowo's series of free policies are exacerbating the funding issues. He started a free school lunch program for students and introduced nationwide free health check-ups, increasing the financial burden. These ongoing free policies may create additional fiscal burdens in governance and are expected to heavily impact the capital relocation project. Amid this situation, concerns are growing over the sustainability of various projects and financial stability.
In a country where many students skip lunch due to economic hardship and the tuberculosis incidence exceeds 10%, free lunches and health check-ups are undoubtedly essential systems. However, the problem is the lack of financial capacity to implement these policies. If there is insufficient fiscal capacity, expanding tax revenues is essential, but the Prabowo government has already decided to withdraw from a proposed increase in the value-added tax.
In 2021, a plan to raise the value-added tax from 11% to 12% was incorporated into the tax law to address budget deficits, but just before implementation, Prabowo changed the plan to apply it solely to personal jets, luxury yachts, and high-priced houses. This limited implementation raises concerns about the difficulty of securing additional tax revenues.
In Indonesia, a legal limit is set to prevent the budget deficit from exceeding 3% of GDP. However, even with the introduction of free lunches and free health check-ups, if there are no additional tax revenues secured, the deficit is expected to reach 3.1% of GDP by 2025. Amid fears of exceeding this threshold, Prabowo decided to cut the budget by approximately 27 trillion won, which corresponds to 8.4% of the government budget.
This budget cut has significantly impacted the public works department responsible for the capital relocation. With a budget reduction of 70%, not only is the capital relocation at risk, but infrastructure construction projects are also facing significant delays. Therefore, Indonesia is currently in a difficult situation, caught between the expansion of budget deficits and the implementation of policies.
As feared, adjustments have been made in a direction contrary to President Joko Widodo's policies. President Joko Widodo is known to have adopted a strategy that promotes foreign investment and rapid growth of employment and GDP through business-friendly policies. In contrast, the new president Prabowo has started to focus his economic policies on increasing national income to boost domestic consumption.
President Prabowo is implementing various policies centered on income improvement, such as lowering taxes and raising the minimum wage by 6.5%. Moreover, he promised to forgive debts for farmers and fishermen and plans to supply 3 million homes annually for low-income individuals. These policies have garnered a positive response from the Indonesian public, and he now enjoys a high approval rating of 80.9%, surpassing former President Joko Widodo.
However, despite this high approval rating, large financial deficits are raising concerns regarding the country's credit among foreign investors. In reality, the Indonesian stock market is experiencing a downturn as foreign investment funds exit, contrasting with the high support rate. This economic situation is expected to have a significant impact on future policy direction and the restoration of trust from international investors.
Prabowo is working with China to enhance the current economic growth rate from 5% to 8%. His membership in the international organization BRICS and his choice of China as the first destination for his overseas visit can be viewed as instances that emphasize this cooperation. He argues that in order to grow, debt must be boldly utilized, and he has plans to modify the legislation that sets limits on budget deficits.
In connection to this, the delay in Indonesia's capital relocation due to budget deficits presents new opportunities for Korean construction companies. However, the current budget issues are slowing down progress, and actual investments need to be determined based on Prabowo's policy changes. In other words, the question of "With what money?" is becoming more pronounced, leading to a greater importance of discussions surrounding financing solutions.
