Societe Generale analysts say Indonesia’s fiscal position is weakening early in 2026 due to front-loaded spending. They say the primary balance is already in deficit, which increases financing needs.
They state the fiscal data adds to existing concerns but does not create a new shock for the rupiah. They keep a bearish view on the currency.
They link the main currency risks to larger net oil and gas imports and a widening current account. They say the fiscal update is a smaller additional driver for FX than these external factors.
They expect the fiscal position to add some upward pressure to longer-dated interest rates by increasing longer-end term premia. They also note the fiscal stance can affect how inflation shocks are absorbed.
They say fiscal execution will continue to be watched, and they expect authorities to remain aware of international market perceptions. They maintain a bearish bias on FX and a bear-flattening bias on rates.
The early-2026 fiscal numbers confirm our bearish view on the Indonesian rupiah. Front-loaded government spending has pushed the primary balance into deficit sooner than expected, reinforcing long-held concerns about the budget. This pressure is already visible in the currency, with the USD/IDR exchange rate pushing past 16,500 in recent trading sessions.
While fiscal worries are present, the main drivers weakening the currency remain the widening current account and the country’s reliance on energy imports. With Brent crude prices now hovering around $95 per barrel, Indonesia’s net oil import bill is expanding significantly, adding to dollar demand. The latest data for the first quarter of 2026 showed the current account deficit widened to 1.2% of GDP, a trend we expect to continue.
This situation should also put upward pressure on longer-term interest rates as the government needs to fund its deficit. Indonesia’s 10-year government bond yield has already climbed above 7.5%, reflecting investor demand for a higher premium. This trend supports a bear-flattening bias, where we expect long-term yields to rise more sharply than short-term ones.
For the coming weeks, traders should consider buying USD/IDR call options or non-deliverable forwards to position for further rupiah weakness. On the rates side, entering into payer interest rate swaps at the longer end of the curve or shorting 10-year bond futures could prove effective. The heightened uncertainty also suggests that option volatility may be undervalued, presenting opportunities for those positioned for a large market move.
