Indonesia’s financial markets stabilised after a bout of volatility at the start of the week (Cabinet reshuffle leads to Finance Minister’s exit). New Finance Minister Purbaya appeared to take a pragmatic approach, saying that achieving the 8% economic growth target was a challenge, with a plan to boost growth to a more realistic 6% over the next few years. He also emphasized that there were no plans to overhaul the current fiscal framework. Budget absorption will be monitored closely, as ongoing economic weakness was pinned on sluggish money supply growth and slow government spending. Modest pace of expenditure and budget cuts announced earlier in the year led to a defacto austerity drive in the first half of the year (spending up only 0.6% yoy in 1H25).
Towards this, there are plans to shift IDR200bn (~$12bn) of the state’s cash balance from the BI to the state-owned banks to spur lending activity, while asking the BI to refrain from draining this surplus via monetary operations. From a liquidity perspective, the move to deploy idle funds bodes well for money velocity. Liquidity markers are, however, already in ample territory, suggesting that any positive impulse to credit activity will also need an improvement in demand from households and corporates. Loan growth slowed to 6.7% yoy in Jul25 vs average 11% in 2024, accompanied by a deceleration in industrial as well as consumption credit. This liquidity infusion adds to broader set of measures to jumpstart economic activity, including dovish guidance by the central bank and rate cuts, tranches of stimulus measures, IDR16trn set aside for credit to village cooperatives, and fiscal-BI coordination to support spending priorities. The proposed cut (by a quarter) in regional/ provincial funding from the centre to IDR650trn for 2026 has also caused discomfort as local leaders sought to boost their coffers by increasing local land and property taxes, which reportedly also added to the groundswell during recent protests. It remains to be seen if the final 2026 budgetary edition makes any adjustments. After an initial jump, USDIDR traded in a broad 16400-16500 range on Wednesday, with spikes attracting a strong response from the central bank. Bond yields were rangebound after a bounce earlier in the week. Indications are that upcoming borrowings might move up the duration curve.
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