Bond auctions witnessed strong demand in the onshore markets this week, prompting an increase in the size of the issuance. Accordingly yields eased, with the 10Y slipping below 6.6%, accompanied by a rally in the rupiah as the dollar stayed under pressure on Tuesday. Despite a modest uptick in June’s inflation to 1.9% yoy from 1.6% month before, in yesterday’s release, readings were well within the central bank’s target. Selected food categories (like chillies, rice etc.) added to the headline, besides airfares and precious metals, while sea/ rail transport tariffs receded on fare discounts announced for June-July. Core inflation flatlined at 2.4% yoy. With a subdued inflation profile, if rupiah retains its recent gains, the window for a cut is likely to reopen for the July policy meet. Strong export growth in May marked a continuation of the frontloading of demand ahead of the July tariff announcements, with shipments to the US in particular growing by double digits. Like the region, imports from China also rose sharply, suggesting rerouting of exports through the region to take advantage of the tariff differential was ongoing. Notably, exports to China also fared well, reflecting strong resource processing-led demand, besides pickup in demand from Asean partners and India. A concurrent benign import growth also contributed to the improvement in the trade surplus (Jan-May25 surplus is up 18% yoy), boding well for the current account math.
On the fiscal front, Finance Minister Sri Mulyani highlighted that the 2025 budget deficit could widen to 2.78% of GDP from the earlier held 2.53% of GDP, in her mid-year fiscal update to the parliament. As we highlighted in Relief rally aids rupiah, fiscal watch, upside risks to this year’s deficit was evident from the slower revenue run-rate, despite subdued expenditure growth. GDP growth projection was lowered to 4.75%-5.0% (DBSf 4.8%) from 5.2% earlier, alongside a reduction in revenue and expenditure estimates vs budgeted numbers. Notably, only 7.1% of the budgeted IDR 71trn towards the flagship nutritious meal program has been disbursed by May25 (link). For the year, an undershoot in total spending is expected to emerge as the key counterbalancing factor to meet deficit targets. The government expressed plans to fund the wider deficit through cash funds and not additional borrowings, pointing to the IDR 85.6trn cash reserve (SAL), which could make it easier for the debt markets to digest deficit slippage risks. The evolving fiscal run-rate will nonetheless be watched closely to gauge risks of an increase in bond issuance targets for the year. 
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