Click  here to read the full report


Growth ends 2025 on a firm note

Indonesia posted an upside surprise in 4Q25, with GDP growth at 5.4% yoy three year high, up from 5% the previous quarter. Annual 2025 growth stood at 5.1% yoy, slightly better than our forecast 5.0%. Confidence indices improved late last year, helped by higher public-sector spending, welfare measures, firm loan growth, and a pickup in demand for services. These drivers were reflected in private consumption rising 5% yoy, alongside a 6% yoy increase (vs 5% in 3Q) in gross fixed capital formation. Under fixed capital formation, heavyweight buildings & structures (3.7% yoy from 3%) quickened on a pickup in construction activity, as well as machine & equipment up 22% yoy from 17% in 3Q, both of which signal strong public sector investments. The contribution of net exports narrowed as a pickup in exports (goods & services) was offset by a concurrent beat on import growth (see chart).

The industry breakdown pointed to a firm finish in services (see chart), including accommodation & food beverages, information & communication, education, and transportation & storage, part of which also symbolises the shift in demand from goods to services. Market-driven volatility, however, persisted with the currency maintaining a depreciating bias and bond yield off lows in 4Q25, limiting incremental policy transmission.

Looking ahead

Investment and consumption activity are likely to be supported by a low base effect, particularly from a change in the religious observance period (mid-Feb26 to mid-Mar26 vs Mar25 last year) in the first quarter of 2026. Demand usually also benefits before Lebaran, as well as the disbursement of the Religious Holiday Allowance (THR). The government also unveiled an IDR12.8trn fiscal stimulus package for Ramadan in Feb-Mar. 

Sentiments might be temporarily hampered by recent volatility in the capital markets, but are likely to stabilise on corrective measures. Indonesia’s authorities continue to initiate steps to boost stock market transparency while actively engaging with index provider MSCI. Besides large scale leadership reshuffle in the securities regulator OJK and the stock exchange, other changes have included an increase in the minimum free float level, assurances of more detailed and timely ownership data, regular updates and dialogue with the MSCI/market participants, efforts to broaden institutional involvement via higher participation of pension & insurance funds as well as the state investment agency in the equity market and acceleration of demutualisation of the stock exchange. While few of these will take time to be rolled out, our view is that a concrete roadmap and meaningful progress of near- and medium-term changes would help to meet the index provider’s requirements ahead of the May 2026 deadline. Additionally, external trade is expected to support growth (see next section for details).

We revise 2026 growth up modestly to 5.3% from the previous 5.2%, assuming fiscal spending remains apace, sentiments benefit once capital market volatility subsides and monetary conditions stay accommodative.

Warm inflation, supportive trade balance

Inflation

January CPI inflation ticked up to nearly a three-year high at 3.6% yoy from an average 1.9% yoy in 2025, driven up by base effects (electricity tariffs were cut the same time last year).This is reflected in the sharp 9.7% yoy increase in the administered prices in the month, while other categories remain at steady to weaker levels. Precious metals, meanwhile, continued to maintain a strong beat (up 15.2% in Jan 26 vs 13% month before). Core inflation was steady at 2.5% yoy, though excluding gold, the core-core reading was benign at 1.3% yoy, signaling slack in the economy. 

Passage of base effects is expected to normalise inflation 2Q onwards. We revise full-year 2026 CPI Inflation 2.8% yoy from 2.5% previously, still within the central bank’s target 1.5-2.5% range.

Goods trade

Beating expectations, Dec25 exports rose 11.6% yoy, owing to larger shipments of palm oil, nickel, and other electrical components. Imports rose 10.8%, leaving a reasonable trade surplus at $2.5bn in December.

Annual 2025 goods exports registered a 6% yoy rise, characterised by a firmer 1H and a softer 2H due to the passage of front-loaded demand, outpacing imports at 2.8%. China remained the largest export destination, with a share of 24%, helped by higher sales of iron & steel, mineral fuels and nickel, followed by the US (11.5%), notwithstanding higher tariffs, India (6.8%), ASEAN (19%), and the EU (7.2%).

Indonesia’s authorities are reportedly in discussions with the US to secure a few exemptions, especially for commodities. Notably, exports to the US have remained resilient despite the tariff rates coming into effect in the second half of the year. Sep-Dec25 exports to the US averaged 9.9% yoy (see chart below), better than 3% to the rest of the world (ex US). The pace of shipments to China also moderated to 4% yoy.  As the chart below shows, firmer exports of key commodities have continued to support export performance, while labour-intensive sectors have lagged the broader upmove. One monitorable is any fresh regulations on exports of these commodity groups, especially nickel, gold, copper, etc., which could impinge on the 2026 performance. 

On imports, China remained the main source of imports as well, ahead of Japan and the US. Purchases of the heavyweight intermediate goods was largely flat on the year, while capital goods witnessed a strong upturn, likely perked by higher government capex spend. Total expenditure (centre and regional transfers) is expected to grow by 11.3% in 2026 (realised 2025 vs budgeted 2026). 

Factoring in global developments and tariffs, we expect Indonesia’s goods trade balance to narrow by a tenth but stay in black in 2026.

Macro stability

Policy is likely to walk a tightrope in 2026, vying to stimulate growth while maintaining overall macro and financial market stability.

Current account

On a quarterly basis, the 4Q25 current account balance is likely to return to a modest deficit over a narrower goods trade surplus. While the current gap will be contained below -0.5% of GDP, capital flows will fall short of financing needs, particularly due to a negative portfolio flows picture, pushing the full-year balance of payments into the red for the first time in six years.

Looking ahead, factoring in our forecast of a narrower trade balance in 2026, we expect the current account deficit to average -0.7% of GDP, with much attention on the strength of financing flows.

Fiscal health

Preliminary fiscal numbers showed the 2025 annual deficit widening to IDR 695trn, i.e., -2.92% of GDP, just shy of the mandatory -3.0% of GDP threshold, primarily due to a shortfall in revenues. State total revenues contracted 3.3%yoy owing to implementation issues impacting the core tax , cancellation of the VAT rate increase, soft commodity prices, and the reallocation of SOE dividends, etc. Spending kickstarted the year on a slower note, facing austerity cuts, but accelerated in the second half as the new Finance Minister pointed to an expansionary fiscal tilt. Add to these, allocations towards the flagship MBG scheme (IDR 52trn vs budgeted IDR71trn) and other social welfare programs caught momentum as the year went by. The government also launched four stimulus packages worth ~0.5% of GDP. Fiscal concerns have amplified the exogenous headwinds already facing the currency this year.

Preliminary numbers for Jan26, cited by the Finance Ministry, showed a 20.5% jump in tax revenues, helped by a low base in the comparable year ago period. Projecting the deficit at -2.68% of GDP, the government has factored in an expenditure increase of 11.3% yoy in 2026 (vs preliminary 2025) to accommodate welfare spending plans, including a sharp increase in the allocation towards the free meal program (IDR 335trn to reach ~82.9mn beneficiaries), defence and support to regional governments.

State revenues are projected to rise by 14% yoy, helped by 21% increase in tax receipts, while non-tax collections might slip. An increase in direct tax rates is unlikely, aside from a deferral of the VAT rate increases. An export tax on gold might be accompanied by a similar tax on coal exports. We await clarity on this count. For the year, the fiscal stance will remain expansionary but within the -3% of GDP cap. We maintain our call for -2.9% of GDP, assuming a slower-than-budgeted rollout of spending and softer revenues.

While monetary policy is likely to remain aligned with the accommodative fiscal stance, rupiah underperformance amid a pickup in inflation and steady growth might keep the BI from lowering rates aggressively this year. Our baseline call is for 50bp more cuts this year, but likely in the second half. The two factor to monitor are the rupiah’s direction and the scale of the US Fed’s easing, contingent on global macro conditions and the scheduled change in the US Fed Chair in mid-May.

Click here to read the full report