Bank Indonesia (BI) is moving away from relying on high yields for its rupiah securities (SRBI) to attract investors. Instead, the central bank plans to offer hedging incentives, according to Destry Damayanti. This shift comes as the BI kept its benchmark rate unchanged to support the currency, a move that will test the rupiah's recent rally and investor appetite. This change in strategy occurs while global monetary conditions are becoming more restrictive, with the Federal Reserve having recently raised the federal funds rate by 25 basis points to 3.75%-4.00%.
Indonesia faces a challenging external environment characterized by a strengthening U.S. dollar, elevated global bond yields, and oil prices exceeding $100 per barrel, partly due to ongoing conflicts in Europe. The rupiah weakened to Rp17,735 per U.S. dollar following the Fed's decision. Despite these external pressures, domestic conditions show resilience, with strong state revenue growth of 25.4% year-on-year through August, outpacing expenditure growth of 17.1% and resulting in a budget deficit of 0.93% of GDP. The government's significant energy subsidies, amounting to Rp331.4 trillion (74.2% of the budget allocation), are supporting household purchasing power.
The demand for Indonesian government securities remains robust, with a September 15 auction attracting Rp60.96 trillion in bids against a Rp32 trillion target. Foreign investors also recorded net inflows of Rp10.1 trillion into government bonds by September 10. However, analysts warn that persistently high energy prices, subsidy needs, and rising funding costs could constrain Indonesia's fiscal flexibility. The principal risk lies in a combination of high oil prices, rupiah weakness, and elevated global interest rates, which would increase subsidy costs, imported inflation, and financing costs simultaneously. Indonesia also plans further foreign-currency global bond issuance, with approximately $2 billion remaining for 2026.
