Indonesia’s macroeconomic landscape is entering a more challenging phase, marked by the end of its historic 72-month trade surplus streak. The USD 1.61 billion trade deficit, driven by a ballooning oil and gas deficit, has stripped away a key external buffer just as the Rupiah faces persistent depreciation pressure. Although the currency stabilized near IDR 17,882 after cumulative rate hikes, the macro environment remains fragile. Bank Indonesia’s decision to hold the BI Rate at 5.75% signals a tactical shift; rather than aggressive rate hikes, the central bank is relying on SRBI yield incentives to draw foreign portfolio inflows, with non-resident holdings rising to IDR 288.65 trillion.
Under the surface, domestic demand is showing visible signs of fatigue. The manufacturing sector contracted sharply, with the PMI plunging to 46.9 due to a drop in new orders and weakening purchasing power. Consumers are feeling the pinch: retail sales contracted by 3.9% YoY, and consumer confidence has hit its lowest level since late 2025. Headline inflation accelerating to 3.34% YoY—pushed by non-subsidized fuel price hikes—further squeezes real income, making it clear that the domestic consumption engine is slowing down.
This defensive rate environment reshapes the outlook for the banking sector. While credit growth remains a bright spot, accelerating to 12.67% YoY, banks are facing imminent margin pressure. Funding costs are repricing faster than loan yields, and we expect margin compression to bite harder in the second half of the year. The impact will be highly uneven. Banks with weak CASA franchises and heavy reliance on time deposits will face a squeeze, whereas dominant CASA players should defend their margins and capture a larger share of sector profitability.
In asset allocation, the JCI’s recovery back to the 6,200 level offers some breathing room, but selectivity is paramount. SBN yields remain elevated, with the 10-year yield rising to 7.28% in line with global yields and domestic inflation risks. While sovereign credit risk is well-contained, extending bond duration is risky given potential food price shocks from El Niño. The current macro backdrop warrants a defensive, quality-biased stance, focusing on franchises with strong pricing power and robust balance sheets.