Executive Summary

Key insights and market outlook

The Indonesian government is tightening fiscal rules for 2026 by setting a uniform 2.5% deficit limit for all regional governments through Finance Minister Regulation No.101/2025 ¹

². This move could constrain spending for regions with limited fiscal capacity ². Meanwhile, Citi projects that the national budget deficit could reach 3.5% of GDP in 2026 due to increased government spending ³.

Full Analysis

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Deep Dive Analysis

Indonesia Tightens Regional Budget Deficit Rules for 2026

New Uniform Deficit Limit Implemented

The Indonesian government has introduced a new regulation setting a uniform 2.5% deficit limit for all regional governments (Pemda) in 2026 through Finance Minister Regulation No.101/2025 ¹

². This regulation replaces the previous rule (PMK No.75/2024) that governed the 2025 fiscal year ¹.

Potential Impact on Regional Spending

Economists are concerned that this uniform limit could constrain regional spending, particularly for areas with limited fiscal capacity ²

. According to Nailul Huda from Celios, regions with strong fiscal capacity are unlikely to face budget deficits, while those with weaker fiscal positions may struggle to maintain their spending capabilities ². Yusuf Rendy Manilet from CORE Indonesia shares similar concerns about the potential pressure on regional finances ¹.

National Budget Deficit Projections

In a related development, Citigroup has projected that Indonesia's national budget deficit could reach 3.5% of GDP in 2026, exceeding the typical 3% limit set by Indonesia's fiscal framework ³

. This projection is attributed to a significant increase in government spending. The combination of tighter regional budget rules and a potentially wider national deficit presents a complex fiscal landscape for Indonesia in 2026.

References