Domestic developments continue to hold sway over the rupiah and IDR bonds, even as markets await a rate pivot in the US. Earlier in the week, Indonesia’s Finance Minister Mulyani raised the possibility of a wider fiscal deficit this year on account of a weaker-than-budgeted rupiah and increase in subsidy costs. The ministry expects USDIDR to trade within 16,000 to 16,200 in 2H24, compared to sub-16000 assumption earlier. Government spending is likely to be higher by IDR 87trn to IDR 3412.2trn, accompanied by a weaker tax revenue (~IDR 1922.trn vs previous IDR 1989trn) as weaker commodity prices might hurt income tax receipts. This led to a revised deficit of IDR 609.7trn (vs previous IDR 522.8trn) assumption, with the % of GDP ratio set to rise to -2.7% of GDP vs earlier budgeted -2.29%. Despite the slippage, the government plans to cut back on its bond issuance target by IDR 214.6trn by tapping into ~IDR 100trn worth of cash reserves.
Separately, lawmakers signaled more confidence on next year’s outlook by cutting the lower end of the targeted fiscal deficit range to (-)2.29% - (-)2.82% of GDP compared to the previous range of (-)2.45% - (-)2.82% of GDP. This assumes better tax collections, alongside signaling the intent of the new government to keep within the -3% of GDP threshold (Indonesia: Easing inflation but limited policy leeway). The public debt ratio is pegged at 37.82%-38.71% of GDP in 2025, marking an improvement from ~39% this year. This contrasts with the new President’s earlier comments which signaled tolerance for higher debt levels of up to 50% of GDP. Baking in the optimism on the 2025 fiscal details, USDIDR came off from June highs to hover at 16300-16350 this week. BI Governor had also suggested that the window to lower rates might open in 4Q24, which we reckon will hinge on rupiah volatility and the incoming government’s fiscal bent. 10Y yield stayed bid above 7%, while foreigners continue to pare exposure to IDR bonds, taking their ownership ratio to 13.9% of outstanding bonds by early-Jul.
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