INDONESIA: J.P. Morgan On Indonesia Fiscal Outlook
The global bank weighs in on the Indonesia fiscal outlook, noting that ample cash reserves can help fund a wider deficit (without strong pressure to increase debt supply). See below for more details.
J.P. Morgan: "Indonesia revised its 2025 budget deficit upwards from 2.5% to 2.8% of GDP, driven by a sizable markdown in revenues and a minor consolidation in expenditures.
Adjusted for major revenue losses (e.g., cancelation of VAT hike, re-direction of SOE dividends), the revised revenue target is achievable, notwithstanding a tariff-led growth shock.
The government has demonstrated a willingness to scale down spending (including the flagship “free nutritious meals” program) to adjust for weaker revenues and stay within the 3% deficit ceiling. We have revised our 2025 budget deficit forecast from 2.5% to 2.9% of GDP.
Wider deficits can be financed by ample cash reserves, limiting supply pressure in the bond market.
Bank Indonesia (BI) has stepped up bond purchases amid tighter onshore liquidity, but this has not crowded out foreign investors, who still seek exposure when external conditions are benign.
Wider budget deficits may not necessarily come with higher supply pressure in the bond market as the MOF may tap into its cash reserves (see link). Since the pandemic, Indonesia has raised more debt than required to finance deficits, leading to an unprecedented rise in the government’s cash balances, currently standing at IDR430 trillion or 1.7% of GDP.
While ample cash reserves may prevent the bond supply outlook from worsening, the private demand outlook for bonds has been constrained by tighter banking system liquidity, leading to an increased role of the central bank in supporting the bond market.
We find that this has not necessarily crowded out foreign portfolio investors. During the sharp upswing in BI bond ownership (7%pt. between Dec-23 and Dec-24) following the end of the burden sharing program in 2022, the share of non-resident holdings only declined 0.4%pt. The bulk of the decrease came from domestic banks (-9%pt.). In fact, foreigners have shown relatively strong buying interest during episodes of benign external conditions, such as in recent months"
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STIR: RBA Dated OIS 2026 Pricing Remains 25bps Softer Than Pre-RBA Levels
RBA-dated OIS pricing is mildly firmer across meetings today.
- Nevertheless, pricing is 12-24bps softer than pre-RBA (May Meeting) levels.
- A 25bp rate cut in July is given an 82% probability, with a cumulative 73bps of easing priced by year-end.
Figure 1: RBA-Dated OIS – Current Vs. Pre-RBA Level
Source: Bloomberg Finance LP / MNI
CHINA: Bond Futures Flat after OMO Withdraws Liquidity
- Bond futures are steady in the morning trading session, following the Central Bank's withdrawal of liquidity during the OMO.
- The 10YR future is flat at 108.97 and remains above all major moving averages. The nearest being the 20-day EMA at 108.82
- The 2YR future is flat at 102.44, sitting just above the 20-day EMA of 102.43
- The CBG 10YR is at 1.69%
JAPAN: Outbound Bond Investment Steady In Recent Years, Stock Still Large
Earlier headlines crossed from Japan's FinMin Kato that the country is seeking more JGB holdings by domestic investors. This comes after recent increased scrutiny of Japan's fiscal position, with poor auction results for longer dated securities driving higher back end yields. Speculation is the BOJ may shift its taper plans, while Japan's MOF may change the mix of its bond issuance, i.e. focus more on short dated rather than longer dated issuance.
- The broader implications of greater domestic participation in JGBs may mean less outbound investment to overseas bonds (and potential equities). This could have implications for offshore debt markets.
- The chart below plots cumulative outbound investment flows into overseas bonds and equities since 2000. Investments into offshore bonds dominates, although outflow trends to both bonds and equities have flatlined in recent years.
- In this sense, Japan has become a less important marginal buyer of overseas bonds/equities in recent years, at least compared to the period prior to 2020. Still, its stock of holdings remains very large.
Fig 1: Japan Cumulative Outbound Portfolio Flows (JPY Billions)
Source: Bloomberg Finance L.P./MNI
- If we see disinvestment of offshore portfolio holdings, particularly in the bond space, what country's/regions might be impacted? The second chart below looks at cumulative flows back to the start of 2005, with North America very dominate (i.e. the US) in recent years.
- This is followed by the EU, although cumulate inflows peaked back in early 2021. Cumulative flows to Germany have been trending lower over the past decade, and are now comfortably negative. France and Italy have been relatively steady, while France has been losing ground in recent years (but still represents the largest stock. Still, this is still modest compared to the cumulative flows that have been seen to the US.
- There are obviously lots of factors in play in terms local investors asset allocation decisions, but these flows/stocks are worth being mindful of if local investors are called upon to support the home bond market.
Fig 2: Japan Cumulative Outbound Flows To Long-Term Debt Securities (JPY, Billions)
Source: Bloomberg Finance L.P./MNI
