■ Indonesia's Economic Momentum Appears weaker in 3Q26: The country's underlying economic growth momentum appears less convincing because headline figures have been heavily propped up by front-loaded holiday spending, leaving core domestic and external demand vulnerable to a projected slowdown in 3Q26. While GDP expanded 5.29% YoY in 2Q26, the World Bank noted that this momentum is tapering off due to strained purchasing power. Real wages are feeling the pinch from persistent food inflation, capping household spending that accounts for over 54% of Indonesia's GDP.

Additionally, elevated global crude oil prices (averaging around USD94 per barrel YTD) have severely overshot the state budget assumption of USD70.

This narrows policy space for spending in order to support growth. Keeping domestic subsidized fuel prices steady has significantly inflated state expenditures, narrowing the government's fiscal headroom to deploy fresh economic stimuli in 3Q26.

Furthermore, due to capital outflows and 8% plunge in IDR earlier in the year, Bank Indonesia aggressively raised interest rates by a cumulative 100bps.

These high borrowing costs are actively rippling through the economy in 3Q26, cooling consumer credit, private non-commodity investments, and large-scale property sales.

Hence, the manufacturing Purchasing Managers' Index (PMI) has remained worrying at just 50.2, partly driven by export slump. Weakening global demand—particularly structural slowdowns in Indonesia's major trading partners like China and Europe—is denting our commodity-heavy export revenues.

Global lenders like the International Monetary Fund (IMF) maintain that Indonesia's broader economic baseline remains relatively solid compared to global peers, but the immediate 3Q26 horizon signals a transition away from high seasonal peaks toward a more moderate, supply-constrained growth path. While investment and fiscal spending remain somewhat supportive, softer household indicators raise concerns that growth remains uneven and increasingly dependent on government-led activity rather than stronger consumption and income growth.

■ External Balance Emerged as a Key Macro Risk: The most significant August development was the widening of the 2Q26 current-account deficit to USD12.49 billion, or 3.3% of quarterly GDP, from USD2.89 billion a year earlier. Combined with the Q1 deficit, the current account accumulated a deficit of around USD16.5 billion in 1H26. Imports grew 8.82% YoY, more than twice the 4.13% growth in exports, while higher energy-import costs further compressed the goods surplus. The deterioration leaves Indonesia increasingly reliant on capital inflows, raising vulnerability to global risk-off sentiment and limiting monetary-policy flexibility.

■ Bank Indonesia Remains Constrained by Stability Risks: BI maintained the policy rate at 5.75% in August, in line with SSI’s forecast, following cumulative tightening of 100 bps since May. Although July headline inflation eased to 2.88% YoY, persistent IDR pressure, high global yields, elevated energy prices, and the wider current-account deficit significantly reduce the scope for near-term easing. Bank credit accelerated to 13.58% YoY in July, but tighter financial conditions could begin weighing more visibly on domestic demand, investment and NPLs in the coming quarters.

■ RAPBN 2027 Faces Increasingly Tight Fiscal Trade-Offs: President Prabowo proposed IDR4,097.2 tn of expenditure and IDR3,426 tn of revenue, targeting 2.40% of GDP fiscal deficit alongside 6.0% GDP growth in 2027. While fiscal execution through July remained relatively strong, with revenue up 21.3% YoY, expenditure up 18.2%, and the deficit at only 0.91% of GDP, the medium-term fiscal position faces growing pressure. Rising infrastructure spending, energy subsidies, social programs, and debt-service costs could constrain policy flexibility, particularly with debt interest estimated at some 19% of state revenue in the draft budget.

■ Structural Reform Progress Remains Vulnerable to Execution Risk: August saw further progress in SOE consolidation, Danantara restructuring, financial-market reform, digital payments, renewable energy, and strategic commodity management. Danantara plans to reduce the SOE portfolio to 254 companies, while the government continues to develop PFII, a Strategic Minerals and Commodities Exchange, renewable-energy projects, and new domestic payment infrastructure. However, the economic benefits remain uncertain and will depend heavily on execution, governance, and whether these initiatives can generate sustainable productivity, exports, private investment, and employment rather than increasing reliance on state-driven growth.