October 28, 2025 | Emerging Markets Debt
Indonesia in Transition
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Indonesia has had an eventful year, with cabinet reshuffles, fiscal shifts, and central bank questions sparking debate over whether recent policy moves will support growth or unsettle markets. Below, we examine several key issues and their potential investment implications.
Cabinet Shifts in the Spotlight
The replacement of Finance Minister Sri Mulyani in early September has raised significant questions about Indonesia’s fiscal discipline, which was widely respected during Mulyani’s long tenure. Her departure introduces uncertainty, particularly as newly appointed Finance Minister Purbaya Yudhi Sadewa has emphasized a presidential directive to prioritize economic growth—a stance that could potentially widen the fiscal deficit.
This outlook, however, should be assessed within a broader context. Indonesia continues to face a backlog of budgetary underspending from previous years, and contingency buffers have already been allocated for the new fiscal year. In addition, the recently established sovereign wealth fund, Danantara, may play a role in “burden-sharing” growth initiatives and supporting populist social programs. As a result, the risk of a rapid fiscal deterioration appears somewhat mitigated.
Unsurprisingly, markets initially reacted negatively to the cabinet reshuffle. Yet, any major correction in financial markets has thus far been contained, thanks in part to Bank Indonesia’s willingness and ability to intervene backed by approximately $150 billion in foreign reserves—and the need to allow the new minister time to establish his credibility.
Danger lies in the possibility that monetary policy decisions may eventually be seen as politically driven.
Still, investor unease appears to linger, not so much about immediate fiscal slippage, but rather about the independence of the central bank and the extent to which the new administration intends to safeguard it.
While we have not found conclusive evidence that Bank Indonesia’s independence has been compromised—at least rhetorically, based on recent statements by Purbaya—the perception that the central bank could act as an extension of government policy is a risk. We believe the danger lies in the possibility that monetary policy decisions may eventually be seen as politically driven. We do not believe this point has yet been reached, but the risks are tilted to the upside.
Greater coordination between the central bank and the government can be beneficial under extraordinary circumstances, as demonstrated by the debt-burden-sharing initiative during the COVID-19 pandemic. Under normal conditions, however, in our opinion, a clear separation between the two institutions is vital.
For this reason, the potential expansion of burden-sharing arrangements by Bank Indonesia beyond crisis management, particularly to fund social spending programs under President Prabowo, is concerning to us. This is compounded by a legal proposal being advanced by lawmakers that would allow the replacement of senior central bank officials—a move likely to prove contentious.
Budget Outlook
We view the 2026 budget—first proposed by Mulyani in August and subsequently revised by Purbaya in September—as carefully calibrated but showing early signs of fiscal slippage. The headline budget deficit has been revised to 2.68% of gross domestic product (GDP), up from 2.48% in the August proposal. This rekindles concerns that the 3% deficit ceiling may once again be tested. Importantly, the budget assumes above-average revenue growth, which carries a significant risk of shortfall. We therefore expect greater reliance on the Ministry of Finance’s excess cash balance to meet fiscal targets.
We expect the short end of the curve to continue outperforming the long end.
Meanwhile, we believe off-budget financing via Danantara will become increasingly important in assessing Indonesia’s fiscal stance in totality. Anecdotal estimates suggest that budgetary support through Danantara’s low-cost financing channels (such as Patriot Bonds issued below market yields and bank loan facilities) could amount to 0.4% to 0.5% of GDP in 2025. This is expected to play a key role in driving the president’s ambitious growth target of 8% over the next two to three years, under the new “8+4+5” stimulus package and related initiatives.
Investment Implications
The Indonesian government bond yield curve has steepened considerably this year. We are assessing how much of this steepness already reflects expectations of higher issuance in 2026, near-term fiscal outlook, political risk, as well as the potential for renewed foreign outflows.
We expect the short end of the curve to continue outperforming the long end, supported by strong bank liquidity, a benign inflation outlook, and expectations of further rate cuts later this year.
However, we have turned more cautious on the rupiah, given heightened foreign-exchange volatility and potential changes to financial sector legislation under the new leadership. Such changes could weigh on foreign investor confidence, even against the backdrop of strong portfolio inflows into emerging market assets.
Clifford Lau, CFA, is a portfolio manager on William Blair's emerging markets debt team.