Fiscal Framework And Policy Credibility
Fitch also pointed to plans to revisit the fiscal framework via a review of the State Finance Law listed in the 2026 legislative priorities. It said this could weaken policy credibility and raise concerns about financing higher fiscal deficits. A negative outlook usually allows for possible further rating action within the next 18–24 months. The outlook change, alongside tensions in the Middle East, is expected to reduce the chance of a relief rally in onshore markets, keeping yields supported and the currency under pressure. Last year, we saw both Fitch and Moody’s cut Indonesia’s sovereign outlook to negative, citing policy uncertainty. Those concerns seem justified as the 10-year government bond yield has since climbed from around 6.7% to its current level of 7.4%. The Rupiah has also remained under pressure, weakening from 15,600 to over 16,100 against the dollar. For the coming weeks, this points towards maintaining positions that benefit from a weaker Rupiah. The ongoing legislative debates about the State Finance Law continue to fuel uncertainty, making USD/IDR non-deliverable forwards (NDFs) or call options a relevant strategy. This allows for profiting from further Rupiah depreciation while managing risk.Rates And Volatility Positioning
Traders should also anticipate Indonesian government bond yields remaining elevated, if not pushing higher. With inflation ticking up towards 3.5%, Bank Indonesia is unlikely to ease monetary policy soon, supporting this view. This makes interest rate swaps, where one pays a fixed rate to receive a floating rate, an attractive hedge against rising financing costs. The persistent questions surrounding fiscal discipline and ambitious growth targets suggest higher implied volatility in both currency and rate markets. This environment makes options contracts potentially more valuable for hedging portfolios against sudden market swings. Traders might consider buying puts on bond futures to protect against a sharp rise in yields. Create your live VT Markets account and start trading now.
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