BNP Paribas assesses Indonesia’s fiscal position after the government capped fuel prices and raised subsidies. It states that if Brent oil averages USD 92–100 in 2026, subsidy costs could reach about 0.6% of GDP.
The bank compares this with Malaysia, where it estimates costs at 0.2% of GDP, assuming currencies stay near current levels. It notes that any further depreciation against the US dollar would increase subsidy costs.
BNP Paribas says Indonesia’s fiscal deficit could exceed the 3% of GDP limit set by parliament in 2026 unless other spending is reduced. It adds that Indonesia’s domestic market is not large enough to meet government financing needs if global funding conditions tighten.
The analysis describes Indonesia’s government debt ratio as 40.5% of GDP. It also states that the debt structure is the most fragile among the countries reviewed and is vulnerable to higher US long-term yields.
We are seeing increasing strain on Indonesia’s public finances as Brent crude currently trades around $98 a barrel, placing it firmly in the high-cost scenario we anticipated. This, combined with US 10-year yields holding near 4.75%, creates a challenging environment for a country reliant on foreign financing. The government’s decision to maintain fuel subsidies means its fiscal deficit is now at serious risk of breaching the 3% GDP legal limit this year.
The direct pressure on the Indonesian Rupiah is becoming more apparent, with the currency recently testing 16,500 against the US dollar. We are seeing signs of concern from foreign investors, as net outflows from Indonesian government bonds have reached over $1.2 billion since the beginning of April. Derivative traders should consider positioning for further IDR weakness, possibly through buying USD/IDR call options or non-deliverable forwards for the coming months.
This fiscal pressure and currency weakness may force Bank Indonesia to act sooner than expected, despite the rate cuts we saw back in late 2025. To defend the currency and ensure government bonds remain attractive, a rate hike could be on the table in the next few weeks. Positioning for higher short-term interest rates through interest rate swaps could therefore be a prudent move.
The perceived credit risk of Indonesia is also on the rise, given the fragile structure of its government debt. The cost of insuring against a default, as measured by Credit Default Swaps (CDS), has ticked up by 15 basis points in the last month alone. Buying 5-year CDS contracts offers a direct way to hedge against, or profit from, a further deterioration in investor sentiment.
Overall market volatility is a key consequence of this uncertainty, a stark contrast to the relative calm of last year. Implied volatility on USD/IDR options has climbed, suggesting the market is bracing for larger price swings. Traders could use option strategies like straddles to profit from a significant move in the exchange rate, regardless of the direction.
