HSBC strategists highlight Indonesia’s solid gross domestic product (GDP) and contained inflation, but warn that the energy shock is starting to weigh on economic activity and the balance of payments. They forecast slower GDP growth and higher inflation in 2026, citing tender capital inflow, confined investment appetite and a persistent negative output gap as key macro challenges.

Energy shock affects growth prospects

“However, deeper analysis suggests that the economy has gradually started to reflect the impact of the energy shock, and markets may be partly reflecting this. On the growth side, the latest readings point to a decline in retail spending, consumer sentiment and export orders. There has been a significant front-loading of fiscal spending and belt tightening may be necessary in the coming months to meet the 3% fiscal ceiling.”

“We forecast that GDP in 2026 will increase by 4.7% y/y (compared to 5.1% in 2025). PMI prices of production factors increased rapidly and are gradually increasing the prices of finished products. We forecast that inflation in 2026 will average 3.5% (compared to 1.9% in 2025).”

“Some observers may see the Indonesian rupiah (IDR) as the main challenge that needs to be addressed. The underlying cause of the IDR depreciation appears to be the balance of payments, with the annual reading likely to turn negative for the second time in 2026.”

“It is tempting to argue that Indonesia does not face a current account problem, given the modest shortfall of -0.1% of GDP in 2025, and that the bigger problem is weak capital inflows, which stood at -0.3% of GDP in 2025. However, in practice, these two factors are intertwined.”

“In fact, we found that companies are cash-rich but reluctant to invest. And weak investment and growth prospects could hurt capital inflows.”

(This article was created with the lend a hand of an artificial intelligence tool and has been reviewed by an editor.)