Highlights:

• Indonesia’s growth momentum in 1Q26 appears stronger than previously inferred, with SSI nowcasting pointing to Q1 GDP growth of 5.54% YoY. SSI GDP forecast materially strengthens the quarterly assessment by showing that domestic activity in 1Q26 remained robust despite external volatility. SSI’s VAR(1) plus nowcasting bridge model projects Q1 2026 GDP growth at 5.54% YoY, implying that the government’s 5.5%–5.6% target remained achievable during the quarter. This reinforces the broader quarterly narrative that geopolitical stress had not yet significantly impaired domestic activity in Q1, even though it had already affected financial markets and policy sentiment.

 

• Inflation became the main near-term macro complication, but the pressure was still largely supply- and policy-driven rather than demand-led. In February’s monthly report, January inflation stood at 3.55% YoY, with core inflation still subdued around 2.5%. By early March, however, headline inflation accelerated to 4.76% YoY in February, above SSI’s 4.0% forecast and above Bank Indonesia’s target ceiling. We interpret this rise as driven mainly by electricity tariff normalization, housing, and food-price pressures rather than overheating domestic demand. That distinction matters because it implies policy caution, but not yet a generalized loss of macro control.

 

• External buffers remained adequate, but they were increasingly used defensively: The quarter showed a gradual erosion of external cushions, though not a breakdown in fundamentals. Foreign exchange reserves declined from USD 156.5 billion in late 2025 to USD 154.6 billion and then further to USD 151.9 billion in February 2026, slightly below SSI’s forecast. The reports make clear that this reflected external debt repayments and Bank Indonesia’s intervention to stabilize the rupiah, rather than a structural collapse in the balance of payments. Reserve adequacy remained strong, covering around 6.1 months of imports, or 5.9 months including debt servicing.

 

• ⁠Financial markets were increasingly driven by credibility variables, not just macro data: January highlighted the MSCI freeze shock as a structural turning point, while February emphasized Moody’s negative outlook and S&P’s heightened attention to fiscal sustainability and reform depth. By March, Fitch had also revised the outlook negatively, and the reports explicitly warned that dual negative outlooks significantly raise downgrade probability over the next 18 months. In that sense, 1Q26 was not only a quarter of economic resilience, but also one in which market pricing became more sensitive to governance, institutional credibility, and fiscal discipline.

 

• The biggest change in March was the re-entry of geopolitics as a direct macro transmission channel: The escalation of the Iran conflict and the renewed risk around the Strait of Hormuz added a new layer of pressure through oil prices, shipping disruptions, inflation expectations, fiscal subsidy risk, and global risk aversion. We see this as a meaningful transmission channel to Indonesia via capital flows, rupiah volatility, higher imported inflation, and tighter financial conditions. By the end of March, bond markets had stabilized somewhat and the rupiah recovered modestly, but the quarter still closed with a much less forgiving external environment than it began with.