INDONESIA: Risk Appetite Could Be Challenging Going Forward

• The news overnight of the removal of the popular Finance Minister Sri Indrawati and replaced with Purbaya Yudhi Sadewa has the potential to negatively impact risk appetite in Indonesia after a period of good performance.  
• Purbaya appears more aligned with President Prabowo's pro growth approach, as opposed to Indrawati's commitment to a 3% of GDP deficit.  
• Observers are wary that Purbaya may be more accommodating of President Prabowo’s expansionary fiscal agenda—particularly ambitious programs like a national free school lunch initiative and defense spending—that could challenge Indonesia’s fiscal discipline.  Purbaya has expressed optimism about achieving 8% economic growth, calling it “not impossible,” and stressed the need to rapidly boost both private sector and government participation to stimulate the economy.
• In his first press conference today, Purbaya has stated that "he will maintain fiscal discipline so that the national budget remains healthy and credible", adding that "The Ministry of Finance must understand the current conditions and current issues. We must not be naive and focus on small issues that hinder strategic policies.”
• Purbaya asks the finance ministry to work with him on ensuring that fiscal policy can be a strong instrument to encourage economic growth
• In early April we published on Indonesia noting "CDS Just Off Highs, FX Reserves Well Placed Relative To History" as tariffs were being threatened, and the trade war escalating Indonesia's equity market struggle leading up to the EID break and before the tariff announcement, already down 8% year to date.
• Soon after the BI was vigilant and kept rates on hold at their April meeting before cutting in May and July.   The Jakarta Composite is +28% higher from its April lows and one of the best regional performers.   
• This is despite foreign inflows being mixed at best this year.  Having said that, the kick higher in the JCI did follow on from large inflows in June.  With August being disastrous with very strong outflows.
• Whilst this outflow picture points to offshore investors already being positioned to some extent for bad news, as we noted above it may take some time to boost/restore confidence, as the market reserves judgement on the new finance minister.
• The other part of the portfolio picture in terms of bonds has been mostly strong so far in 2025. So this could also become a pressure point. 

Fig 1:  Indonesian Equity Portfolio Flows Monthly versus the JCI Month End Close January - August

• CDS is well off April highs, rallying to new lows of +64bps by September, showing little reaction to protests on the streets of Jakarta over recent weeks.  
• The weakness has been in the currency with the IDR down -0.40% over the last six months versus regional peers the Thai Baht +7.1% and Malaysian Ringgit +5%.  
• This week's Indonesia Foreign Reserve data release shows that reserves are falling, down US$2bn from the prior month, most likely as the Central Bank continues to defend the currency.  We expect this trend to continue, although strong portfolio pressures might make it difficult for the 16500 level to be a line in the sand.  
• The CDS hasn't moved today post the news.  The currency has weakened to new lows since the April sell off at a time when the JCI fell into the close yesterday to be down -1.28% and is down -0.84% today.  Bond yields have reacted negatively also with the front end higher by +12bps in the 5-year.  
• Judging by the August flow data the risks are for a potential correction for the JCI following several months of good performance, bond yields are reacting already and should be monitored closely.  If risk sentiment turns drastically negative, that could in turn equate to CDS widening.

Fig 2: Indonesia, Malaysia and Thai 5-Yr CDS Spread 

Source: MNI - Market News/Bloomberg