Should Indonesia be alarmed by its large budget deficit?

Deficit stood at 2.8% of the GDP in 2015.

Indonesia's budget deficit exceeded targets in 2015, but OCBC believes that this should not be a great cause of concern for investors and policy makers.

Excessive government spending led to a deficit ended up being 2.8% of GDP, far above the 1.9% that was first hoped for, and easily the largest shortfall in over two decades.

"Still, the silver lining here is that the deficit did not breach the 3% limit set by the 2003 State Finance Law. The law is vague in terms of what happens if the limit does get breached. Precisely because of that, there had been some concerns that some perennially creative politicians may use it as an excuse to threaten the government, with even stray talks of presidential impeachment for good measure," OCBC said.

"Overall, the fact that Indonesia’s budget deficit had crept up sizably from 2014’s 2.1% of GDP should not in itself be too much of a concern for investors. The fact that there is a legal cap at 3% acts as a reassurance. More importantly, however, the stock of government debt remains low at 27% of GDP. That is far below the 60% cap that is prescribed by the same 2013 law. It is also lower than what the debt burden carried by its regional peers. Malaysia’s stood at 52.7% of GDP in 2014, for example. Moreover, there is also the realization that the deficit has risen because the money is spent on fruitful infrastructure projects, rather than fuel subsidies before," OCBC added.