Fiscal developments continue to be closely scrutinised to gauge slippage risks and changes to the budget limits. The government revised the 2026 deficit target higher to -2.7% of GDP last week, vs -2.5% set earlier to accommodate an increase in spending, but kept below the -3.0% of GDP mandated threshold. Bulk of the increase in revised expenditure is due to higher allocations towards regional governments (IDR 693trn vs IDR 650trn earlier). We recall that the proposed cut in regional/ provincial funding in the previous draft budget had contributed to the groundswell during recent protests. Also concerning were reports that lawmakers’ legislation priority list for next year might include a review of the State Finance Law, that regulates fiscal limits. Also under consideration might be a merger between the SOE ministry and sovereign wealth fund Danantara, since the management of state-owned companies was taken over the agency earlier this year. 4Q25 might witness deliberations on a bill which will allow authorities to seize assets in corruption cases, besides explore a tax amnesty scheme etc.
The fiscal run-rate in first eight months of 2025 continued down the path of below-target revenue growth and a modest pickup in expenditure. Jan-Aug25 revenue growth was down -7.8% yoy, while spending was a modest 1.7% yoy. This saw the budget deficit reach -1.35% of GDP vs full year target at -2.78% of GDP. Citing a surplus in the primary balance, Finance Minister Purbaya pointed to the need to expedite spending to spur growth. IDR bond yields, especially the belly tenors bounced off lows, erasing the drop seen in wake of BI’s unexpected rate cut. Rupiah tested below 16600/ USD to Apr25 lows, down -3% year-to-date. We expect IDR assets to stay under pressure in midst of consistent drip of fiscal/ growth newsflow.
Separately, Indonesia is set to conclude a free trade agreement (FTA) with the European Union today, which will effectively lower tariffs to nil on over 95% of the product lines. For instance, duties on auto imports will be lowered from 50% to nil after five years, with other sectors from capital goods to farm produce to also enjoy preferential rates. With the US trade policy turning restrictive, Asian countries are strengthening ties with non-US partners, besides undertaking demand-accretive reforms/ stimulus at home to boost growth.
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