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Jennifer Kusuma, analyst at ANZ, points out that in Indonesia, Jokowi’s cabinet for the period 2019-2024 was sworn in on 23 October and the broader economic affairs team is now joined by private sector talents as hopes for economic reform have been rekindled.

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“The translation to markets, however, will be less certain. We take this opportunity to remind of the structural challenges Indonesia faces to lift its economic growth rate, and to show the long-term impact of economic stagnation and policy deadlock on onshore interest rates.”

“In particular, we outline reasons behind the upward sticky LCY yields, the highest in the region on a nominal and real basis. The economy’s dependence on commodity cycles and inability to broaden revenue sources has continued to limit Indonesia’s fiscal space. More recently, the rise in the need for financing that can support growth has faced a shrinking pool of available onshore funds.”

“Structural issues in the economy and onshore supply-demand dynamics are, nonetheless, less of an immediate concern in the current low-global-rates environment. We are constructive on IDR bonds in the near term and neutral in the medium term. Our preference is to stay on the front-to-belly part of the curve, up to the 10y segment.”

“Given the fiscal constraint, we expect Bank Indonesia (BI) to continue supporting the economy with interest rate and liquidity easing. Supply risks have also eased. Following a surprise USD1bn worth of 30y USD bond issuance on 23 October and considering the quarter-to-date LCY issuance, we estimate that MOF will be looking at IDR50-60trn more to issue from auctions this year. FDI is the next reform focus that could materially and sustainably strengthen external balances. In the near term, the DNDF will help regulate FX volatility.”