■ **Indonesia entered 2H26 with underlying quality of growth deteriorating.** Following 5.61% YoY growth in 1Q26 and 5.29% in 2Q26, the economy still appeared resilient on the surface. However, 3Q indicators increasingly pointed to weaker household purchasing power, cautious discretionary spending and uneven private-sector activity, leaving government expenditure and investment to carry larger shares of growth. This raises the risk that growth momentum could slow more visibly once fiscal support becomes less aggressive.

■ **September manufacturing rebound should not be interpreted as a structural recovery.** PMI improved to **52.4 in September** after slipping below expansion territory in August. While output, new orders and employment strengthened, the improvement follows several months of weak industrial momentum and could prove temporary if domestic demand remains soft. Higher financing costs, imported input prices and weaker purchasing power remain significant constraints on manufacturers entering 4Q26.

■ **Inflation is becoming an increasingly serious macroeconomic constraint.** Headline CPI accelerated from 2.88% YoY in July to 3.19% in August and **3.28% in September**, moving increasingly close to Bank Indonesia's upper target boundary. With food prices, energy costs and IDR depreciation creating additional pass-through risks, inflation could become more difficult to contain in 4Q26. This leaves BI in an uncomfortable position where maintaining high rates risks further weakening domestic demand, while easing policy could trigger additional currency and inflation pressure.

■ **Indonesia's external position remains a major vulnerability despite August trade surplus.** The **USD12.49bn current-account deficit in 2Q26** highlighted the economy's growing dependence on external financing. Although the merchandise surplus widened in August, much of the improvement came from 11.63% MoM decline in imports while exports were only up 1.51% MoM. This suggests that the stronger trade balance may partly reflect weakening domestic demand rather than improving competitiveness, allowing for quick improvement reversal from higher imports or energy prices.

■ **Bank Indonesia has increasingly limited policy options.** BI maintained the policy rate at **5.75% throughout 3Q26** after delivering 100 bps of tightening in May–June, but the combination of persistent IDR weakness, rising inflation, elevated US yields and external-account concerns leaves little room for monetary easing. Another period of significant IDR depreciation could even force BI to consider additional tightening despite already-softening domestic demand, increasing downside risks to consumption, credit growth and investment.

■ **Fiscal policy remains one of the few major buffers supporting growth, but its capacity is not unlimited.** The fiscal deficit remained contained at **0.93% of GDP through August**, supported by revenue growth, but which has often been attributed to prolonged retention of tax restitution. That said, higher oil prices, larger subsidy requirements, higher government funding costs and potentially weaker economic activity could deteriorate the fiscal position relatively quickly. If revenue momentum slows while expenditure remains elevated, the government may face a more difficult trade-off between supporting growth and maintaining fiscal credibility.

■ **The external environment has become substantially more hostile for Indonesia.** The Federal Reserve's September rate hike to **3.75%–4.00%**, elevated global bond yields and oil prices above USD100/bbl increase the risk of capital outflows from emerging markets. Indonesia is particularly exposed through the IDR, imported inflation and higher energy costs. A prolonged period of high US rates could force domestic monetary conditions to remain restrictive for longer than the economy can comfortably absorb.

■ **Overall, the macro outlook entering 4Q26 is increasingly fragile rather than resilient.** Headline GDP growth and September's manufacturing improvement mask mounting pressure from weaker household demand, rising inflation, IDR depreciation, external-account vulnerabilities and tightening global financial conditions. Unless consumption and private investment recover meaningfully, Indonesia risks entering a period of slower growth combined with persistently high inflation and interest rates—a considerably more difficult policy environment heading into 2027.