Key Points
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Despite solid growth momentum in Q4, Indonesia enters 2026 with increased policy and market uncertainty. MSCI has raised concerns over the investability of Indonesian equities, while Moody’s has revised Indonesia’s sovereign credit outlook to negative, placing downward pressure on local financial markets.
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On a positive note, local authorities have responded proactively to address market transparency concerns, introducing measures to improve equity investability in an effort to stabilise market sentiment and retain Indonesia’s MSCI Emerging Market status. MSCI is scheduled to review Indonesia’s market classification in May.
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Fiscal risks have increased following weak tax revenue collection in 2025 and plans to expand the 2026 budget by 11.3%, which rely on a strong rebound in government revenues. That said, we continue to expect the authorities to keep the fiscal deficit within the 3% statutory limit. While economic growth remains a policy priority, it is likely to be pursued in a broadly prudent and measured manner.
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The rupiah has remained under pressure despite periods of broad USD softness, reflecting Indonesia‑specific policy risk premia and softer support from major commodity exports. We expect rupiah weakness to stay in H1 2026, before possibly stabilising in H2 on the back of a much weaker dollar and our assumption that domestic policy uncertainty will ease.
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Monetary policy will likely be focused on price stability in the near term, given recent rupiah weakness and rising inflation. Headline CPI inflation rose to 3.55% in January, above BI’s 1.5%-3.5% target range, with risks skewed to the upside as the output gap narrows. Further rate cuts are likely to be cautious and carefully timed to avoid unnecessary pressures on the rupiah.
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Some structural challenges persist despite resilient headline GDP growth data, including productivity growth that appears to have stagnated relative to that of the US, while the current account remains reliant on the commodities outlook. On a positive note, FDI inflows remain relatively resilient, supported by the government’s mineral downstreaming policies and sustained foreign investment from China, Hong Kong, and Singapore.
