Indonesia Bonds – Gauging valuation buffer

Research evidence excerpt

Indonesia Bonds – Gauging valuation buffer

ore suitable period for

comparison for fair levels for IndoGB yields. IndoGB yields are around 50-100bps too BoP: Balance of payments

tight on various measures compared to even the lower end of 2018 ranges, which points

towards need for more risk-premium buffer, in our view. CA: current account

Yields to drift higher until USD turns DMO: Debt management office

We believe some risks are priced in as foreign positioning is light and the fiscal push for DNDF: Domestic Non deliverable forward

growth is well-flagged. Tail risks of breaching the deficit cap this year have been

reduced after oil prices declined and recent spending cuts. However, broader concerns EM: Emerging markets

on the fiscal front may still remain that would need to be addressed by larger spending IDR: Indonesian Rupiah

cuts or tough revenue reforms to rebuild investor confidence. BI’s support for IndoGBs

would likely be missing in 2H while funding needs still remain high. IndoGB: Indonesia local currency

government bond

In our view, risks are tilted towards higher yields as the external environment may

remain tough this year (with stronger USD and Fed hikes). That would keep IDR under MoF: Ministry of finance

pressure due to persistent domestic capital flight, foreign portfolio outflows against

NDF: Non deliverable forward

depleting FX reserves buffer (with a large overhang of forward liabilities and short-term

capital flows). Higher interest rates (including bond yields) would remain a key part of NEER: Nominal effective exchange rate

BI’s toolkit for IDR defense. That will likely push IndoGB 10y fair value range towards

7.5-8%, on our estimates. We revise our IndoGB 10y forecast to 7.6% for 3Q26 and REER: Real effective exchange rate