Macro Strategy

2024: A Year Defined by Volatility

• The year 2024 stood out as one of the most volatile periods in capital markets outside a recession, marked by two distinct episodes.
• Concerns over a weaker IDR took center stage, prompting BI to actively intervene in stabilizing the market, an effort expected to intensify.
• An erratic foreign flow trend clearly shows investors’ lack of alacrity, as they continue to view Indonesia as a trading market.

2024: A Year Defined by Volatility. The year 2024 emerged as one of the most volatile periods in capital markets outside of a recession, fueled by heightened global expectations for monetary easing. Indonesia's market, particularly government bonds, was significantly influenced by global sentiment, even as foreign ownership hit a record low. We note two distinctive episode last year:

• In 1H24, escalating geopolitical tensions heightened inflationary risks, altering rate-cut expectations. The 10-year US Treasury yield (UST) rose 30 basis points (bps) to 4.18%, while Indonesian government bond (INDOGB) yields increased 24 bps to 6.72%. Intensified tensions in Q2 pushed UST and INDOGB yields to 4.69% and 7.25%, respectively. INDOGB yields stayed elevated as global central banks cut rates more aggressively than the Federal Reserve, strengthening the US dollar.
• In 2H24, yields declined initially as the Federal Reserve clarified its rate-cut timeline, with the 10-year UST and INDOGB yields dropping 85 bps and 69 bps to 3.63% and 6.44%. However, renewed reflation risks, driven by Middle East tensions and Trump’s election victory, reversed the trend, pushing yields back to 4.58% for UST and 7.02% for INDOGB toward year end.

Weak IDR left limited scope for monetary policy adjustments. The Indonesian rupiah (IDR) faced notable volatility in 2024, peaking near IDR16,500 mid-year, strengthening to IDR15,100 by late September, and weakening again to IDR16k toward year-end. In response, Bank Indonesia actively intervened to stabilize markets, including substantial purchases of Indonesian Government Bonds of IDR490tn in 2024. These efforts were instrumental in mitigating excessive market fluctuations and supporting the currency. Toward year end, BI has up the intervention activity to stem further IDR decline, something that we would expect to continue until early 2025.  Fiscal policy is expected to play a pivotal role in driving Indonesia’s economic performance in 2025, marking the beginning of the country’s journey toward its target of 8% economic growth by 2029.

Increasingly Weaker Foreign Flow Trend. An erratic foreign flow trend clearly shows investors’ lack of alacrity, as they continue to view Indonesia as a trading market. In 1Q24, total inflows declined significantly, turning negative in March, driven primarily by a sharp drop in INDOGB inflows, while outflows in equity and SRBI had minor impacts. In 2Q24, inflows rebounded strongly, peaking in May due to a surge in SRBI inflows, with moderate contributions from INDOGB, while equity inflows remained marginal. From June to August, inflows moderated but stayed positive, with INDOGB as the dominant contributor and smaller, steady inflows from SRBI and equity. However, the trend reversed in the last quarter, with inflows sharply declining in September and turning negative in Nov-Dec. This shift was driven by weakening INDOGB inflows, minimal or negative SRBI and equity inflows, which compounded the overall outflows.  These fluctuations underscore the volatility in capital flows to Indonesia throughout 2024, shaped by external and domestic challenges. Foreign flow into INDOGB played a stabilizing role during certain periods, reflecting its attractiveness to investors amid uncertainty, although the broader trend points to the market's sensitivity to geopolitical risks and a lack of convincing domestic catalysts.

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