Indonesia Sovereign Strategy: Better fiscal signalling, but valuations keep us UW

Research evidence excerpt

J P M O R G A N

Asia Pacific Global Markets Strategy

20 August 2026

Indonesia Sovereign Strategy

Better fiscal signalling, but valuations keep us UW

The 2027 budget unveiled stronger growth targets and a narrower budget

deficit of 2.4% of GDP, which is a step in the right direction for investor

sentiment and rating agencies.

The BI leadership transition appears less disruptive than initially feared, with

acting Governor Destry Damayanti’s reported nomination supporting policy

continuity in the near term.

We maintain our UW Indonesia recommendation in the EMBIGD model

portfolio as implementation risks remain and valuations still screen tight

versus peers.

Indonesia can likely avoid a near-term downgrade if fiscal and external data

stay on track into 4Q26, but rating agencies are likely to remain cautious until

there is clearer evidence of consolidation.

We continue to recommend buying INDON 4.1% 34€ and selling INDON

4.75% 34$ as we still view the EUR versus USD spread differential as a

dislocation rather than a change in fundamentals.

The fiscal signals from the 2027 budget and the BI leadership transition are

a step in the right direction. The 2027 budget deficit target of 2.4% of GDP,

together with President Prabowo’s emphasis on keeping the deficit as small as

possible and ultimately targeting a balanced budget, should help to calm both the

sovereign bond market and rating agency concerns in the near term. As highlighted

by our economists, the proposal implies a narrowing from the revised 2.85% of

GDP target in 2026 and remains below the statutory 3% ceiling (Indonesia: More

signs of fiscal prudence from 2027 Budget, C. Boonnuch). From the sovereign

perspective, the budget is a near-term positive given the key drivers of Indonesia’s

underperformance have been negative investor sentiment around policy

uncertainty, fiscal credibility and external buffers. The recent BI leadership

transition has added to these concerns, given the already elevated focus on central

bank independence, but Senior Deputy Governor Destry Damayanti serving as

acting governor and her reported nomination as a governor candidate should help

signal policy continuity in the near term.…