Macro Strategy

Beyond The Rebound

 

• Temporary oil relief faded quickly, but Indonesia’s upper-tier fuel hike should generate only modest inflation pressure.
• Stronger data and supply driven inflation keep the Fed sidelined, with easing deferred but hikes still unlikely.
• The next phase of risk assessment will hinge on ratings resilience and confidence in market reform progress.

 

Impacts on non-subsidized fuel price hike. The brief reopening of the Strait of Hormuz following a temporary truce initially eased supply concerns and pushed Brent down nearly 10% to USD86/bbl, supported by optimism over negotiations, including discussions on the release of frozen Iranian funds. However, the relief proved short-lived. The US maintained its naval blockade, while Iran imposed strict transit conditions that effectively preserved its control over maritime flows. Tensions escalated again on 18 April, when Iran reclosed the Strait in response to continued US pressure, including plans to seize Iran-linked tankers, sending Brent back above USD90/bbl. This episode once again underscores the absence of a durable de-escalation signal.

The resulting pressure on energy prices has fed into Indonesia’s recent adjustment in upper-tier non-subsidized fuel prices, although the inflation impact should remain contained. Over the weekend, Pertamax Turbo rose by IDR6,300, while Dexlite and Pertamina Dex increased by IDR9,400, or around IDR8,367 on average. As we highlighted in our report Finding the Right Balance (6 Apr), our model suggests that inflation pressures from unsubsidized price adjustments are relatively more limited and mainly operate at the margin, rather than serving as a key driver of overall inflation. We highlight our 4 key observations:

 

1. While non-subsidized fuels account for 44% of total fuel consumption, their inflation relevance is diluted by composition effects, as the category is still dominated by Pertamax, whereas the products seeing the sharpest increases, Pertamax Turbo, Dexlite, and Pertamina Dex, are consumed by a narrower, higher-income segment with weaker pass-through to broader prices. Consistent with historical patterns, a IDR1,000 increase in these upper-tier fuels is estimated to add only around 0.02–0.15ppt to inflation, well below the impact of subsidized fuel adjustments.
2. The latest hikes imply a mechanical inflation impact of 0.17–1.26ppt under a linear assumption, although the realized pass-through will likely be materially smaller and closer to the lower bound, given the limited weight and weak second-round effects.
3. The 2026 adjustment differs from the 2022 episode, when price increases were phased gradually over three quarters, from January to September, before peaking and beginning to normalize toward year-end. Historically, the lag from peak prices in September to October 2022 to the initial decline was only around 60–90 days, suggesting relatively quick normalization once peak pricing was reached. By contrast, the 2026 increase is larger and more front-loaded, implying a sharper but still contained near-term shock.
4. Given the narrower user base and limited linkage to mass consumption, these hikes should add only marginal inflationary pressure, reinforcing the view that this is more a case of relative price normalization than a broad-based inflation trigger, with limited implications for monetary policy at this juncture.

 

The Fed: No Cut, but No Clear Hike Signal Either. Fed communication appears to turn more cautious (details in Exh 3 for recent remarks from Jefferson, Williams, Miran, Waller, Goolsbee and Hammack). Compared with the pre-February FOMC period, when comments on the war impact were still limited, recent Fed communication has increasingly acknowledged that the supply shock is adding to inflation, both directly through higher energy prices and indirectly through rising intermediate costs. Even so, most Fed officials still view the current policy rate as appropriate. Governor Miran remains the main exception, as he continues to advocate a rate cut at the next meeting. More cautionary tone also reflected in market pricing, with expectations now leaning toward no change in the Fed funds rate through 2026 and the first cut pushed back to at least mid-next year.

 

Recent data continues to support a hold scenario. Inflation remains still above Fed target with February core PCE staying at 3.0%, while headline consumer inflation rose to 3.3% in March 2026, the highest level since May 2024, largely driven by energy prices. The April Beige Book also suggests that the war’s impact on firms extends beyond energy, with many businesses adopting a wait and see approach. At the same time, March labor market data came in stronger than expected, reversing February’s softness and further reducing the urgency for near-term easing. Reading on inflation expectations and swap pricing, however, still indicate that these price pressures are likely to be temporary, with longer-term expectations remaining relatively stable, which leaves the door open for easing over-time.

 

The leadership transition adds another layer of uncertainty. Kevin Warsh, President Trump’s nominee, still needs Senate approval, but some lawmakers are withholding support pending developments related to the Justice Department’s investigation involving Chair Powell. This could delay the transition process. While Powell’s term as Chair ends in May, his Board membership runs until January 2028, and he could continue serving as chair pro tempore if a successor is not confirmed in time. This could reduce the scope for a rapid dovish shift in policy. As a result, the upcoming Senate hearing for Warsh will be an important watchpoint, as markets assess how he balances political pressure for lower rates against economic conditions that still do not clearly justify easing.

 

The Next Primary Focus: S&P Ratings and MSCI announcement. Indonesia faces two key 2Q26 catalysts that could shape market sentiment: the upcoming S&P Global Ratings review and the MSCI assessment. In its recent statements, S&P has signaled that Indonesia’s sovereign rating is more exposed to a prolonged Middle East conflict than many regional peers. This vulnerability is amplified by structural constraints, especially the interest-to-revenue ratio, which is likely to move above the 15% threshold, one of the key sensitivities in S&P’s framework. This stands in contrast to 2022, when S&P revised the outlook to stable despite rising energy prices, supported by narratives of strong commodity-driven terms-of-trade gains, improved external balances, and a credible fiscal consolidation path.

 

That said, several factors could still help preserve the current rating and outlook. The fiscal deficit remains below the 3% of GDP threshold, at around 2.9%, supported by budget reallocation, while government debt is still relatively low at around 40% of GDP, well below the level of many BBB-rated peers. External risks also remain manageable, with gross external financing needs expected to stay below critical thresholds and growth still projected above 5%. In addition, the government has stepped up policy communication, outlining plans to reallocate around IDR190 tn,

including savings from biodiesel, social programs, and a 10% cut in less productive spending to help contain subsidy pressures. Indonesia’s export mix, particularly coal, CPO, and nickel, also continues to provide a buffer, supporting resilience even though the terms-of-trade support is less pronounced than in 2022.

 

On MSCI, regulators have shown meaningful progress ahead of the May review. Key steps include a gradual commitment to implement the 15% free float rule, the publication of a shareholder concentration list, disclosure requirements for ownership above 1%, and improvements in investor classification. These measures should help signal stronger alignment with MSCI standards. However, some challenges remain, particularly around achieving full transparency on ultimate beneficial ownership (UBO), which may take longer to resolve. For now, we see much reduce plausibility for a downgrade to frontier market status in the upcoming review, given the regulatory progress already made. Some outflow risk also remains, especially if the release of the high concentration stock list leads to the exclusion of certain stocks from the index. Such scenario, however, would have far more limited impact than in a full downgrade scenario. YTD, in equity market, foreign has reduced position by IDR32.1tn.

 

The market rebound - UST yields moved lower last week with the 10-year falling 5 bps to 4.26% and the 2-year down 10 bps to 3.71%. Domestically, the 10-year INDOGB yield stayed volatile, briefly touching 6.61% on 14 April before ending the week at 6.58%. Indonesia’s 5-year CDS narrowed by 6 bps to 82 bps, pointing to some improvement in sovereign risk sentiment. Meanwhile, the DXY softened 0.56% w-w to 98.10, although the IDR still weakened 0.54% to IDR17,190/USD.

 

• Fixed Income Flows. Foreign investors recorded weekly net inflow of IDR0.66tn into the SBN market (as of 16 April 2026), bringing MTD inflows to IDR3.58tn and total holdings to IDR857tn. From the domestic side, banks remained the main source of outflows, posting IDR100tn weekly outflow (MTD outflow: IDR64.81tn). On the other hand, Bank Indonesia, excluding repo, continued to absorb supply with weekly inflows of IDR47.51tn (MTD inflow: IDR28.97tn). Meanwhile, mutual funds saw IDR11.76tn in weekly outflows, while insurance and pension funds together recorded IDR12.19tn in w-w outflows.
• Equity Flows. The JCI continued to move higher, rising 2.4% last week to 7,634. The rebound was driven mainly by domestic investors, as foreign investors remained in sell mode. Foreign outflows in the third week of Apr26 reached IDR2.3tn, bringing total MTD outflows to IDR6.6tn. Over the past four weeks, weekly foreign outflows have stayed elevated, ranging from IDR2.3tn to IDR3.7tn.

 

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