Macro Strategy

The 2026 Proposed Budget: Building Up Momentum

 

  • The 2026 budget balances fiscal prudence with acceleration growth, prioritizing 8 national agendas, aiming for 5.4% GDP growth.
  • Revenue target projects 9.8% growth, driven by higher tax collections requiring improvement in tax collection and reforms.
  • The fiscal plan moderates deficit to 2.48% in 2026, controlling debt supply while conservative yield assumptions provide fiscal buffer.

 

The Dual Focus. The 2026 proposed budget reflects the government’s dual focus on advancing national priority programs while reinforcing its commitment to fiscal prudence. This balance is expressed through a lower fiscal deficit target, signaling a cautious stance on debt sustainability, yet paired with aggressive growth target. The budget framework is organized around eight main agendas: Food and energy security, MBG program, health service improvements, education reform, rural development and Koperasi Merah Putih, strengthening defense, investment acceleration and global competitiveness. Beyond these agendas, the budget also underscores two critical principles: greater efficiency in operational spending and the reinforcement of productive spending. These are intended to ensure that fiscal resources are directed toward programs that yield high multiplier effects to overall domestic economy. There are also some challenges. The government has set a 5.4% GDP growth target for 2026, which appears optimistic given the backdrop of external uncertainties, domestic execution risks, and a reduced fiscal deficit. In our view, achieving this target will require smooth and timely policies execution. On the positive note, historically, program execution tends to improve in the second year of administration as initial obstacles like nomenclature adjustments are usually settled.

 

The Revenue Growth drivers. The 2026 fiscal revenue target reflects a more optimistic stance, with projected growth of 9.8% from 2025 outlook. This higher target raises questions about its achievability given the current stage of the global commodity cycle and still weak domestic economic activity. Revenue growth are mainly comprises of 3 factors:

 

  1. Tax Revenue. The government expects tax receipts to increase by 13.5%, lifting their share of total fiscal revenue to 75%, the highest level on record. This signals a stronger reliance on tax collection as the backbone of fiscal sustainability, which potentially reflects efforts to broaden the tax base and improving compliance.
  2. Excise and Customs Revenue. Excise duties are projected at IDR241.8tn, a 5.7% increase from 2025 outlook. However, the excise rate adjustment for 2026 has not yet been finalized. Customs revenue is projected to rise 13.2% to IDR 92.5tn.
  3. Non-Tax Revenue. In contrast, NTR is expected to decline by -4.6% y-y to IDR 455tn. This contraction comes despite the fact that the 2025 outlook had already excluded SOE dividends redirected to Danantara which suggests limited buffers outside of tax revenue.

In our view, Indonesia’s fiscal revenue historically has shown a close correlation with the commodity cycle, as measured by the World Bank’s Commodity Price Index. Peaks in commodity price growth typically translated into revenue surges the following year, while downturns in commodities led to revenue shortfalls. With the commodity super-cycle having peaked in 2021–2022, current conditions point to a more muted outlook. Against this backdrop, the government’s 2026 revenue target appears ambitious, as it targets above the average growth levels typically seen during commodity downcycles. That said, significant improvements in tax compliance, stronger economic growth, and deeper structural reforms have become increasingly imperative to prevent revenues from falling short of target.

 

More Centralised Spending. The 2026 state budget spending plan targets a 7.2% increase to IDR 3,780.6tn vs 2025 outlook. The spending structure is notably more centralized, as Central Government expenditure is projected to rise sharply by 17.8%, while Regional Transfers are down 25.5% to IDR 644.1tn, the lowest level since 2016. Such change potentially aim to consolidate fiscal resources to have more direct execution of national priorities. The key spending allocations are:

 

  1. Free Meal Program (MBG). The allocation for MBG nearly doubles to IDR 334tn in 2026, compared with IDR 171tn in 2025 budget and the program aims to cover 82mn beneficiaries, although the budget still falls below the earlier IDR 400tn estimate, which indicates improved cost efficiency in program implementation. Beyond 2026, expenditure growth for MBG is expected to remain steady, guided by assumptions of 2.5% annual inflation and 1% student population growth.
  2. Other Priority Sectors. Education at IDR 757.8tn (4.6% y-y), Health at IDR 244tn (23.4% y-y), Food Security at IDR 164.4tn (32.2% y-y), Energy Security at IDR 402.4tn (-19.3% y-y) and Housing spending of IDR 57.7tn, targeted to build 770K units, contributing to inclusivity in urban development.
  3. Debt Service (Interest Payments). Interest payments are projected to increase by 8.6% to IDR 599.4tn, accounting for 15.9% of total spending, slightly higher than 15.7% in 2025. While the share of interest payments has risen significantly from 12.5% in 2022, the pace of increase has slowed since 2023. This moderation, combined with continued growth in non-interest expenditure and the prospect of lower bond yields, suggests improving fiscal space for real-sector and productive spending in the medium term.

 

Fiscal Buffer Protection. Central element of the 2026 fiscal framework is the government’s plan to moderate the deficit to 2.48% of GDP, compared with 2.78% in 2025. In our view, this move not only signals a continued commitment to sound fiscal management, but narrower deficit also implies more controlled debt issuance, which in turn creates potential downside risk for government bond yields as supply pressure eases. Despite that, the government projects the 10-year INDOGB yield at 6.9% in 2026, much higher than our forecast of 6.00%. This discrepancy is not unusual as official assumptions have consistently set yields at a higher level. Such a conservative approach provides a built-in fiscal buffer, since actual yields that come in below projections would effectively reduce interest costs and generate additional fiscal space or even a surplus.

 

For 2026, we estimate gross bond issuance at IDR 1,241.8tn, with domestic issuance accounting for IDR 1,043.1tn. This marks an increase from the 2025 outlook of IDR 1,003.2tn, despite the narrower fiscal deficit. The apparent paradox is explained by the potential use of SAL in 2025, which enabled the government to finance a wider deficit without significantly increasing debt supply. With less scope for SAL utilization in 2026, bond issuance naturally rises even as the fiscal gap narrows.

 

Capital Market – Strong Inflows Continue.  The market saw mixed movements during the week. The US 10-year Treasury yield climbed by 6 basis points to 4.33%, while the 2-year yield eased slightly by 1 basis point to 3.75%. Domestically, Indonesia’s 10-year government bond (INDOGB) yield declined by 3 basis points to 6.39%. Currency markets also reflected such movements, with the US Dollar Index weakening by 0.27% to 97.92, while the IDR strengthened by 0.80%, closing at Rp16,160. At the same time, Indonesia’s sovereign credit risk improved, as shown by the 5-year Credit Default Swap (CDS) spread narrowing by 7 basis points to 67 basis points.

 

  • Fixed Income Flows – Foreign investor participation in the fixed income market remained strong, with a weekly net inflow of IDR13.10tn into government securities (SBN), bringing total foreign holdings to IDR948tn. On MTD basis, cumulative foreign inflows reached IDR12.76tn. Domestic institutions also contributed positively with the banking sector recorded weekly inflows of IDR4.86th (MTD: IDR21.54tn inflow). Bank Indonesia, excluding repo transactions, reported IDR12.05tn in inflows over the week, although it still posted IDR8.42tn in outflows on a monthly basis. Other sectors also supported inflows, with mutual funds adding IDR2.54tn and insurance and pension funds collectively contributing IDR1.32tn during the week.

 

  • SRBI Flow – In the short-term securities market, Bank Indonesia’s outstanding SRBI declined by IDR1.64tn to IDR720 trillion. Foreign investors showed renewed interest, recording IDR4.25tn in inflows for the week. However, YTD trends remained negative, with cumulative foreign outflows reaching IDR94.52tn. As a result, foreign ownership in SRBI now stands at IDR120tn, or around 17% of the total outstanding amount.

 

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