Macro Outlook 2026

The Year of Transmission – From Policy to Impact

Volatility at the Forefront.  Early 2025 was marked by sharp market volatility driven more by abrupt policy shifts than weakening fundamentals. A strong dollar, high yields, and tight liquidity weighed on sentiment, while brief relief from easing geopolitical tensions quickly faded. Stress peaked with renewed US tariff actions that triggered recession fears and extreme risk-off moves. As the year progressed, overlapping shocks, from tariffs to geopolitical flare-ups, kept markets volatile, though both global and Indonesian conditions proved increasingly resilient. Stability gradually returned by mid-year as trade tensions paused and diplomatic signals softened, helping sentiment recover. Indonesia’s macro backdrop also proved more durable, with the government increasingly focus on accelerating growth momentum. In 2026, external risks remain elevated, with geopolitical tensions and unpredictable trade policies continuing to pressure global confidence and capital flows.

The Dual Levers of Growth. Indonesia’s growth model rests on consumption and investment. Consumption remains the main stabilizer, contributing over half of GDP and expanding at a steady 5–6%, cushioning downturns. Investment is more volatile but essential for lifting medium-term growth and productivity. With fiscal space narrowing, policymakers face trade-offs between short-lived demand and durable investment-led expansion. Empirical results show consumption boosts growth quickly but fades almost immediately, while investment effects emerge with a lag and persist for longer. Sustaining growth above 5% will require preserving consumption momentum while accelerating productive investment, particularly FDI, to anchor long-term capital inflows.

Reassessing the Investment Cycle. Investment cycle is shifting structurally toward manufacturing-led FDI alongside deeper downstream industrialization. Nearly 60% of FDI now flows to the secondary sector, led by metals, chemicals, machinery, and electronics, while mining and services have normalized. This transition improves investment quality and spillovers: each IDR1tn of FDI generates about IDR1.13tn in additional GFCF, with the strongest effects in capital-intensive projects and regions outside Java. However, domestic capex remains cautious, with subdued corporate investment, below-normal capacity utilization, and uneven PMI recovery, leaving industrial momentum ahead of domestic follow-through.

Growth Over Differentials. Growth differentials, rather than rate or yield spreads, are the key driver of sustained foreign inflows. Historically, inflows often strengthened even as BI–Fed and INDOGB–UST spreads narrowed. Empirical analysis shows yield and rate gaps mainly affect short-term flows and lose significance once global factors are considered. In contrast, stronger relative growth delivers a more persistent inflow response. Rate differentials still anchor carry, but durable portfolio and FDI inflows hinge in Indonesia consistently outperforming peers on growth.

Rate Outlook and Yield Path.  Monetary dynamics point to a lower and more stable yield environment in 2026. The Fed is expected to begin easing in December, followed by further cuts (50bps) in 2026 as inflation moderates and labor markets soften, despite political noise. Domestically, Bank Indonesia is projected to cut rates by around 50 bps, supported by contained inflation, ample liquidity, and improved policy transmission. Together, this supports lower bond yields, with 10-year INDOGB projected at 5.62%–6.14% (baseline 5.88%), and a broadly stable yield curve anchored by strong domestic demand.

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