President Joko Widodo’s government is facing a widening budget deficit and is anticipating the tax amnesty to help bring finances back in to balance.

“Indonesia’s ratings balance a low government debt burden, favourable growth outlook and limited sovereign exposure to banking-sector risks with a weak external position compared with ‘BBB’ category peers that makes the country relatively vulnerable to shifts in market sentiment and a weak – but improving – business environment,” notes Fitch.

Analysts point out that Widodo is adding jobs in major construction projects for unskilled labor, which could stimulate demand for basic consumer goods. Indonesia’s central bank has lowered interest rates this year, something to be mindful given the hefty financial services weights found in EIDO and IDX.

“While core and headline inflation still are on the low side, headline inflation should increase this year due to the government’s plan to curtail fuel and electricity subsidies – which will ultimately increase fuel and electricity prices for consumers – and because of growing food prices. In this context, it becomes unlikely that the Bank Indonesia (BI) will cut rates further … Against this backdrop of stable rates and sustained economic activity, we expect portfolio inflows into debt and equities to increase this year. This should also support the Indonesian rupiah (IDR) against the U.S. dollar (USD),” according to the Strategy-Pavillion note seen in Barron’s.

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