Macro Strategy: Prepare for Repricing

Macro Strategy

Prepare for Repricing

US-Iran escalation lifts tail risk, supports safe havens, pressures risk assets. Stagflation risk is now back on the fore.
Ratings risk is back: after Moody’s negative outlook, S&P and Fitch reviews loom, with debt service to revenue now under scrutiny.
The IDR200tn SAL rollover extends to Sep 2026, prolonging excess liquidity, anchoring funding costs but IDR risk remains.

US-Iran Major Tension Escalation, Impact and Risks. Following last week’s report, Risk and Catalyst Watchlist: What Matters Now, where we highlighted geopolitics and tariff uncertainty as the two key risks back in focus, the former has now escalated materially. The geopolitics tension escalation has intensified, with US strikes on Iran reportedly resulting in the death of Iran’s Supreme Leader, a development that raises the risk of rapid disorder and meaningful disruption at key oil and trade chokepoints if Iran responds with major retaliatory actions. The main concern is that the US–Iran conflict escalation could disrupt shipments through the Strait of Hormuz, a critical channel for global oil flows. Although crude oil prices are up c.20% YTD, the price could still move materially higher if the current escalation intensifies. Moreover, potential retaliatory by Yemen’s Houthi group, an Iran-aligned force, on commercial ships near the southern end of the Red Sea, similar to end 2023 period, could force to wider rerouting, lengthening delivery times, and lifting freight and insurance costs higher, another reflationary risk. Since the 2022 Russia–Ukraine war, many geopolitical shocks have eased once talks restart, so volatility spikes usually fade more quickly. This time, however, there’s risk that elevated volatility could last relatively longer than in past episodes.

Globally, further escalation would likely lift energy prices and boost demand for safe haven assets such as yield assets and gold, at the expense of riskier assets. In our view, higher energy prices could still create reflationary pressure and push back the timing of rate cuts, putting stagflation concern back into the center stage. However, the downside risk should be less severe than during the peak tightening phase. As of Feb 26, the GDP-weighted global policy rate stands at 4.39%, down from the late 2023 peak of 6.4%, although still above the pre Covid range of 2.5% to 3%. As such, market expectations for further cuts have, so far, remained broadly rational given lower probability of global recession, reducing risk for downside surprise. For Indonesia, these risks typically transmit through two main channels:

Trade Channel - A key risk from higher geopolitical tensions is a spike in energy prices, which could push inflation higher and threaten the recovery in aggregate demand, especially if consumer confidence weakens. Fiscal pressures may also rise, as higher subsidies and energy compensation would be needed to stabilize prices, potentially widening the fiscal deficit. With the recent Moody’s outlook downgrade, fiscal flexibility is more limited.

Financial Channel - This remains Indonesia’s primary vulnerability. Periods of heightened global risk tend to weigh on emerging markets, triggering a shift toward safe haven assets and leading to foreign outflows. Such episodes would directly increase IDR volatility, raise import costs, heighten inflation risks, and add pressure to external debt conditions.

The Next Headwind, Upcoming Ratings Reviews. Revisiting the downside scenarios, after Moody’s assigned a negative outlook in early February, attention has shifted to the next rating reviews from S&P and Fitch, given concerns they could take a similar stance. S&P warned last week that Indonesia’s interest payments have “very likely” breached its key 15% of government revenue threshold and said a sustained breach could raise the risk of negative rating action. To gauge the risk, we compare Indonesia’s latest macro and fiscal metrics against the downside triggers cited in prior S&P and Fitch reviews.

For S&P, one key trigger is a fiscal deficit that persistently breaches the legal ceiling of 3% of GDP. Indonesia remains within that limit, with the FY2025 deficit at 2.92% of GDP, extending a long record of compliance outside the COVID period, and it also compares well against several BBB peers such as Mexico, India, and the BBB average.

Another trigger is interest payments rising above 15% of revenue on a sustained basis. Using the state budget definition, Indonesia has been above that level since 2023, with our FY2025 estimate at 18.7%, but S&P’s methodology tends to produce a lower ratio, implying a FY2025 reading around 16.9%. Even then, S&P’s emphasis is on sustained breaches, and over the past decade Indonesia only exceeded 15% during the pandemic period.

S&P also flags external vulnerability if Gross External Financing Needs rise above 100% of current account receipts plus usable reserves. On this aspect, Indonesia was at 93.4 in 2024, and with higher current account receipts expected in 2025 on the back of export growth, the ratio should stay below the threshold.

For Fitch, the main downside risks are a material rise in public debt toward BBB peer levels, and a sustained weakening in FX reserve buffers. Indonesia’s 2025 debt ratio is forecast at 40.5%, far below the BBB peer average of 73.4%, while reserves are expected to remain broadly stable around USD 153 bn, equivalent to about 6.4 months of imports. Despite FX pressures, Bank Indonesia still has multiple tools to manage volatility, including spot intervention, NDF and DNDF operations, and liquidity absorption via SRBI.

The IDR200tn SAL Funds Extension. In our previous report, “Off the Lows, Still Exposed to Headwinds,” we assessed the potential impact of SAL withdrawal from its placement in Himbara banks, which was initially due on March 13, amid limited room for a near-term BI rate cut. We also elaborated on the impact of SAL placement to date. However, in a recent press conference, Minister of Finance Mr. Purbaya announced that the SAL placement will be extended for six months, now maturing on September 2026. Below are our key assessments of the expected impacts:

Money Supply Growth. Following the SAL placement, M2 growth accelerated starting September 2025, after averaging 6% during Jan-Aug 2025, and picked up to an average of 8.4% during Sep-Dec 2025. By January 2026, money supply growth reached double-digits at 10% y-y, supported by stronger Net Claims on the Central Government (22% vs 13% y-y in December 2025). Loan growth also rose to 10.2% y-y in January 2026, from 9.7% in December 2025. With the extension, we expect both money supply and credit growth to remain supported.

Banking Liquidity. SAL placement had a stronger impact on deposit accumulation than credit expansion, with TPF growth rising from 5.6% y-y in Jan–Aug to 9.0% in Sep–Dec 2025 and remaining elevated at 10.6% y-y in early January 2026. The extension is expected to contain funding repricing pressures from intensified deposit competition, which would otherwise raise deposit rates and banks’ cost of funds. Liquidity should remain ample as the anticipated March outflow is deferred, reducing the need for aggressive deposit gathering, supporting stable LDR levels, and limiting defensive balance sheet adjustments. Overall, excess liquidity is likely to persist longer, delaying normalization.

Bonds Yields. The SAL extension is expected to compress 10-year yields following Moody’s announcement and lower the likelihood of a near-term rate cut, with yields recently around 6.46%. Corporate bond yields should also remain contained amid increased investor caution linked to MSCI uncertainty. By easing liquidity pressures, the extension reduces the likelihood of banks selling SBN, supporting demand, particularly in short- to medium-tenor government bonds. We expect yields to remain contained in the near term, with longer-term dynamics driven by global rates and fiscal supply.

BI’s SRBI Operations. BI’s SRBI operations supported liquidity by maintaining net maturities from Dec-24 to Nov-25, reducing outstanding from IDR 970 tn to IDR 700 tn by end-Oct 2025, alongside a decline in yields to around 4.65%. However, since Nov-25, yields have risen to around 5.14% (Feb 27), with bid-to-cover ratios declining, reflecting tighter liquidity management to support the rupiah. With the SAL extension, prolonged excess liquidity increases the need for BI to recalibrate SRBI issuance to maintain rupiah stability and limit FX pressures.

Capital Market – Brace for Volatility. Global and domestic markets. UST yields moved lower last week, with the 10-year yield down 11 bps w-w to 3.97% (27 Feb 2026) and the 2-year yield down 10 bps to 3.38%. Domestically, the 10-year INDOGB yield fell 4 bps w-w to 6.43%. The DXY was broadly flat, edging down 0.07% w-w to 97.72, while the rupiah strengthened 0.60% to IDR 16,771 per USD. On the risk metric, Indonesia’s 5-year CDS widened 3 bps w-w to 84 bps.

Fixed income flows. As of 25 Feb 2026, foreign investors recorded a net SBN outflow of IDR3.79tn w-w, bringing total foreign holdings to IDR 875 tn. On MTD basis, foreign outflows totaled IDR3.35tn. Domestically, banks posted an outflow of IDR31.6tn w-w (MTD: IDR54.14tn). In contrast, Bank Indonesia (excluding repo) recorded an inflow of IDR56.96tn w-w (MTD: IDR59.51tn). Mutual funds saw an inflow of IDR3.98tn w-w, while insurance and pension funds recorded a combined inflow of IDR3.42tn w-w.

Equity flows. The JCI down 0.4% last week, keeping its YTD performance among the weakest in the region at -4.8%. Foreign flows turned positive in the 4th week of Feb 26, with net inflows of c. IDR1.9tn, but this was not enough to offset earlier selling, with MTD foreign flows still in net outflow territory of IDR4.6 tn. Flow pressure has remained concentrated in a few large and liquid names, with BBCA, BUMI, INKP, INDF, and BBNI consistently recording outflows over the period.

… Read More 20260302 Macro Strategy