SINGAPORE, August 28, 2026 – Indonesia’s economic fundamentals remain solid. However, elevated global oil prices are increasing fiscal pressures through higher energy subsidies, while evolving market dynamics and financial market volatility underscore the importance of maintaining investor confidence. This will require conserving fiscal sustainability, preserving Bank Indonesia’s role in safeguarding macroeconomic and financial stability, strengthening governance, and ensuring credible, predictable, coordinated, and clearly communicated policies.
This assessment follows AMRO’s Annual Consultation Visit to Indonesia from July 27 to August 20, 2026. The mission was led by Group Head and Lead Economist Ravi Balakrishnan. AMRO Director/CEO Yasuto Watanabe and Chief Economist Dong He also participated in policy discussions with the authorities.
Recent developments and outlook
AMRO staff project Indonesia’s economy to grow 5.3 percent in 2026, supported by resilient domestic consumption and firm investment activities, backed by government spending on priority programs.
“Amid heightened global uncertainty and multiple challenges at home, prolonged high global energy prices and volatile capital flows are weighing on Indonesia’s outlook,” said Balakrishnan.
“The government’s policy initiatives address important development needs. Achieving their intended outcomes will require carefully calibrated policy design and effective implementation, supported by clear and consistent communication and close coordination across agencies. Preserving the central bank’s ability to focus on macroeconomic and financial stability will also be essential to maintaining policy credibility, something fundamental to supporting sustainable economic growth,” he added.
AMRO staff project annual average inflation to rise to 3.4 percent in 2026, remaining within the official inflation target range. Subsidized retail energy prices are expected to continue mitigating the pass-through from higher global oil prices. Nevertheless, inflationary pressures could intensify because of higher energy prices, the effects of a strong El Niño on the production of key agricultural commodities, and the lagged impact of rupiah depreciation. Under a more adverse scenario, these factors could temporarily push inflation above the target range in the coming months.
Indonesia’s external position remains solid, notwithstanding the current account deficit being projected to temporarily widen given higher oil imports and income repatriation by foreign corporations. Portfolio investment is expected to record modest net inflows. This is supported by foreign inflows into Bank Indonesia Rupiah Securities (SRBI) and, to a lesser extent, the government bond market, despite net outflows from the equity market. While international reserves have moderated, they remain above conventional adequacy benchmarks.
Fiscal discipline has been maintained. Given rising costs of energy subsidies, the government has rationalized several budget items to keep the budget deficit within the statutory limit of 3 percent of GDP. In particular, priority programs such as the Free Nutritious Meal and the Red and White Village Cooperative Programs have been streamlined. Overall, in 2026, the fiscal deficit is projected to remain at 2.8 percent of GDP, as revenue gains from improved tax administration are expected to offset higher fiscal spending on energy subsidies and the implementation of priority programs.
Bank Indonesia’s policy actions have been responsive and well calibrated under extremely challenging conditions. Bank Indonesia raised the BI-Rate by a cumulative 100 basis points during May and June 2026, before staying on hold at 5.75 percent during the last two meetings. It has also strengthened monetary operations, foreign exchange market measures, and other policy measures to support capital inflows and reinforce rupiah stability. At the same time, the central bank has prudently recalibrated its macroprudential policy settings to support credit intermediation and sustain economic growth. This is supported by a resilient banking sector with strong capital and liquidity buffers, sound asset quality, and continued profitability.
Risks, vulnerabilities, and challenges
As Indonesia is a net oil importer, elevated global energy prices would place additional pressure on its external and fiscal balances, although higher prices for other commodity exports could partly offset these effects.
Portfolio outflows amid heightened global uncertainty contributed to rupiah volatility in Q1 2026, with net inflows driven mainly by SRBI in Q2 providing support to the rupiah. Looking ahead, financial markets remain sensitive to developments regarding fiscal sustainability, governance, and policy predictability, as these factors remain key for maintaining investor confidence.
Over the longer term, Indonesia faces several structural challenges, including a declining government revenue-to-GDP ratio, a large informal sector, commodity-dependent exports, slow progress in raising agricultural productivity, and the need to further strengthen the business climate. There are important upside growth factors, however, including the potential for state-owned enterprise (SOE) reform under Danantara and the debottlenecking process to bear fruit.
Policy recommendations
Ensuring fiscal sustainability will require a two-pronged strategy of enhancing revenue mobilization and improving spending efficiency. More targeted energy subsidies, continued rationalization of non-priority spending, and greater efficiency in the priority programs would help create fiscal space for social assistance and infrastructure investment. Further improvements in tax administration and compliance, together with measures to broaden the tax base and introduce new sources of revenue, would strengthen domestic revenue mobilization. As planned, the 3-percent deficit ceiling should be maintained, given its role in anchoring macro-financial stability over the past two decades.
Monetary policy should remain focused on rupiah and price stability, supported by clear communication and prudent reserve management. Strengthening investor confidence and attracting durable capital inflows will require credible and coordinated policy action across public sector agencies. Implementation of the law on the Development and Strengthening of the Financial Sector should safeguard Bank Indonesia’s ability to focus on its core stability mandates.
Financial inclusion policies should continue to complement efforts to expand access and financial literacy with stronger credit infrastructure and responsible lending practices. Consistent implementation of capital market reforms, alongside continued deepening of the domestic money and foreign exchange markets and strengthening of market infrastructure, will be essential to preserving investor confidence and supporting broader market accessibility and efficiency.
Improving productivity and long-term growth will require reforms in the governance of SOEs, agriculture, and human capital development. Leveraging the new debottlenecking task force, market-oriented policies and efforts to improve the ease of doing business should be sustained and strengthened. The establishment of the Danantara Sovereign Wealth Fund offers opportunities to support the country’s development priorities. Realizing these benefits will require a robust governance framework, well-defined mandates, clear institutional responsibilities, and transparent accounts.
A coherent set of coordinated policy measures, implemented steadily and communicated clearly, can help reshape the economy by fostering high-performing enterprises in strategic sectors, supporting the emergence of a larger middle class, and putting Indonesia on a path toward its Golden Vision of achieving high-income status by 2045.
The AMRO team would like to express its appreciation to the Indonesian authorities and participating organizations for their valuable insights and candid discussions during the mission.
About AMRO
AMRO is an international organization established to support macroeconomic resilience and financial stability of the ASEAN+3 region, comprising members of the Association of Southeast Asia Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support regional financial arrangements, and provide technical assistance to the members. AMRO also serves as a regional knowledge hub and provides support to ASEAN+3 financial cooperation.