HSBC strategists said Indonesia’s GDP and inflation backdrop has been resilient, but argued an energy shock is beginning to weigh on activity and the balance of payments. Recent indicators point to softer momentum, including declines in retail spending, consumer sentiment and export orders. Fiscal spending has been frontloaded, which they said could imply tighter conditions later in the year as authorities seek to comply with the 3% fiscal cap.
They forecast GDP growth of 4.7% year-on-year in 2026, down from 5.1% in 2025, while projecting inflation averaging 3.5% in 2026 versus 1.9% in 2025. PMI input prices have risen and are feeding into output prices. The strategists linked rupiah weakness to external accounts, expecting the balance of payments to record a second consecutive annual deficit in 2026. They cited a current account shortfall of -0.1% of GDP in 2025 alongside capital inflows of -0.3% of GDP, and pointed to corporates holding cash but remaining reluctant to invest.
Currency Weakness and Market Strategies
We see the Indonesian Rupiah’s depreciation as the main issue to watch, driven by a weak balance of payments. The IDR has recently breached the 16,500 level against the US dollar, reflecting poor capital inflows. Derivative traders should consider positioning for further currency weakness, potentially through buying USD/IDR call options to profit from a continued decline.
The slowdown in the broader economy, marked by falling retail sales and consumer sentiment, creates a headwind for Indonesian equities. Bank Indonesia’s latest consumer confidence survey showed a drop to 115.5, the lowest reading this year, signaling cautious household spending. We believe this justifies buying put options on the Jakarta Composite Index (JCI) to hedge against a potential market downturn.
Inflation Outlook and Investment Concerns
With inflation forecast to rise, we expect pressure on the central bank to tighten monetary policy. The latest inflation print already ticked up to 3.2% year-on-year, and a weak currency will only add to price pressures. This situation, reminiscent of the 2018 emerging market volatility, makes interest rate swaps that bet on higher rates an attractive strategy.
The underlying problem is a lack of investment, even though companies are holding plenty of cash. Foreign Direct Investment (FDI) data for the first quarter of 2026 confirmed this trend, showing a 15% drop compared to the previous year. This suggests the economic weakness is not a temporary shock but a more persistent issue, reinforcing our cautious outlook for the coming weeks.
