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Global worries have overshadowed recent domestic positive data releases. Firstly, Indonesia’s 2024 fiscal deficit wrapped up the year at a narrower -2.3% of GDP compared to the earlier estimate of -2.7%, backed by a 2.0% increase in revenues and 7.3% jump in expenditure. Much of the widening assumed in the 2024’s deficit (vs 2023 deficit of -1.6%) was due to an increase in expenditure to accommodate the incoming government’s flagship programs. However, the final net outlay was subsequently trimmed to limit the scale of deficit slippage. A narrower deficit in 2024 provided space for the authorities to partly pre-fund this year’s needs, raising an estimated IDR86trn, which includes the November’s global sukuk issuance and Dec’s IDR bond auctions.
The 2025 deficit estimate stands at -2.5% of GDP, resting on higher revenues to fund welfare and social spending programs. An avenue to lift revenues is, however, likely to disappoint after the scheduled broad rollout of an 1% increase in the VAT rate was shelved, imposing the hike only on luxury goods and services. Officials now expect to raise IDR 1.5-3.5trn in incremental receipts vs potential IDR 15trn on a wider rollout. Officials tread a fine line between the need to improve tax collections but also being mindful of the need to preserve the purchasing power of low-income households, given the regressive nature of indirect taxes.
Secondly, full year inflation averaged 2.3% last year, in line with our forecast and within the BI target range, accompanied by a benign core print. BI is, however, unlikely to venture into rate cuts this month to preserve financial market stability. Despite these supportive data bytes, IDR 5Y and 10Y bond yields continue to stay elevated above 7.0%, taking cues from the UST price action. Demand for SRBIs recovered sharply this month to lock in higher returns amidst ample IDR onshore liquidity, marking a floor for short-term rates. A bid dollar has kept rupiah on the backfoot, below 16200 this week, notwithstanding FX reserves at a record high of $155.7bn. IDR is down -0.6% vs dollar on ytd basis after declining -4.6% last year. With markets primed for a strong NFP outcome later this week, pressure on the local currency and bonds is likely to persist.
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