Bank Indonesia has chosen to hold its policy rate at 4.75%. We’re at a point where our nation is experiencing a perfect storm of economic headwinds. Indonesia has announced strong measures as this export growth to the United States has fallen off a cliff. At the same time, the current account has nosedived into a massive deficit. These developments lead to fears about the country’s long-term economic viability and the strength of its currency.
By August and September this year, the growth rate of Indonesia’s exports to the US had fallen to a mere 6% year-on-year. That’s a stark contrast to the extraordinary 26% growth that we witnessed in Q2. This slowdown signals potential difficulties ahead for the Indonesian economy, particularly as it seeks to rebound from the pandemic’s lingering effects.
Current Account and GDP Growth Concerns
To make matters worse, Indonesia’s current account posted a $3 billion deficit in Q22025. That’s an important shift from the almost-equal level seen in Q1. This continued decline is a sign of growing stress on the country’s economic underpinnings. Indonesia’s GDP growth has cooled off to 5.0% y-o-y in Q3. This is down from 5.1% in the last quarter.
These numbers mirror the larger trend of the country’s economic deceleration, deepened by faltering private consumption. Only the government has seemed to grasp the urgency of all these issues and so introduced even more measures aimed at fostering this growth. The blueprint lays out a Stimulus Package #3 aimed at rebooting the economy. It further directs excess revenues into state-owned banks to make sure state priority projects receive priority treatment.
Fiscal Policy and Currency Pressure
The 2025 update budget forecasts a 3% drop in government capital expenditure, fuelling worries about where the new level of investment will come from. The closing real rate differentials between Indonesia and the United States have put increasing pressure on the Indonesian rupiah (IDR). These key factors continue to force the IDR beyond its breaking point. Just to make things worse, foreign investors have lost their appetite for Indonesian debt. This change follows major normative shifts from the Finance Ministry and the path of a massive fiscal stimulus.
Fiery September and October foreign institutional investor (FIIs) capital outflows are indicative of this loss of faith. As these inflows reversed, Bank Indonesia will face a year of hard work to maintain investor interest. The IDR’s weak profile continues to be tilted to the downside, largely owing to ongoing questions about the independence of institutions.
Future Prospects and Economic Strategies
Currency weakness appears poised to last. This is acutely the case given Indonesia’s sensitivity to rate differentials, with the market pricing in one more 50 basis point cut from Bank Indonesia this cycle. Deteriorating trade performance and declining rate differentials are weighing on the IDR. On top of this, fiscal worries could push the shekel to a new low versus the US dollar.
Looking ahead, Bank Indonesia has a daunting task. To maintain stability of the financial environment, it has chosen to ensure that Foreign Institutional Investor (FII) inflows are prevented. The labor market still, the central bank’s fight remains an uphill battle, as it kayos through these strong economic headwinds.