Macro Strategy: Trump’s Tarriff Conundrum

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DAAZ	7,150	375	5.54%
MFIN	3,600	250	7.46%
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SMDM	1,140	225	24.59%
PANI	11,175	175	1.59%
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ITMG	25,950	75	0.29%

Macro Strategy

Trump’s Tarriff Conundrum

Trump’s aggressive tariff announcement is expected to have significant market impacts, given its broader and more extensive scope.
Indonesia's primary risks would arise from financial channels, driven by currency pressure on stronger DXY and risk-off sentiment.
Positive progress on Indonesia’s fiscal outlook with signal to reduce supply risk, uphold fiscal discipline and support growth improvement.

Trump’s Tarriff Risk and Impacts. President Trump has moved forward with his tariff threats, imposing a 25% tariff on Canada and Mexico and an additional 10% tariff on China. These new levies, set to take effect on Tuesday (4th Feb), add to existing tariffs, giving affected countries a brief grace period to respond. The policy also targets the de minimis exemption, a loophole that has allowed Chinese manufacturers to ship goods to US consumers tariff-free. To avoid major disruptions, Trump has limited Canada’s oil and gas tariff to 10%, recognizing that Canada supplies 52% of US petroleum imports. In response, Canada has announced a direct retaliation, planning to impose a 25% tariff on USD106bn worth of US goods. Meanwhile, Mexico and China have yet to specify their countermeasures. Historically, tariffs have had negative economic consequences. Trump's previous tariff measures led to job losses, reduced business investment, and lower household incomes, with consumer earnings taking an estimated USD8 bn hit, according to a 2019 FOMC excerpt released last week. Later studies have reinforced these findings, highlighting how higher costs and trade uncertainty slowed growth by prompting businesses to delay investments. As more countries are affected by the latest tariffs, the resulting uncertainty will pose a greater risk to global macroeconomic growth and stability. While a tariff delay through successful negotiation remains possible, nothing is certain at this stage.

The polarization between Trump and the Fed seems to widen. At the recent World Economic Forum in Davos, Donald Trump reiterated his push for further rate cuts. Meanwhile, in its latest FOMC, the Fed reaffirmed a cautious stance, maintaining a "wait-and-see" approach as it monitors the evolving trade policy landscape. The growing contrast between these conflicting signals increases the risk of policy misalignment, potentially forcing the Fed into a reactive rather than proactive stance. In our view, any rate cut would be better received if driven by economic fundamentals rather than external pressure. Over time, this reactive stance could increase the risk of the Fed falling behind the curve and introduce additional risk catalysts to monetary policy globally.

What’s the initial impact to Indonesia? Indonesia's primary vulnerabilities in this scenario would initially stem more from financial channels than trade channels. The overall impact will depend on the severity of the tariffs, market expectations, and Indonesia’s policy response. On the financial channel, the impact will primarily come in two forms: 1. Currency Risk. The DXY tends to strengthen when the US raises tariffs, particularly due to the Canadian dollar’s (CAD) weight in the index. Steep tariffs on Canadian goods would reduce demand for the CAD, causing it to weaken and strengthening the DXY further. Tariff threats against the EU would have a greater impact due to the EUR's substantial weighting in the DXY basket. A stronger DXY and weaker CNY could lead to IDR depreciation, making imports more expensive, increasing inflation risks, and adding pressure to Indonesia’s external debt payments; and 2. Risk-Off Sentiment. Trade tensions and higher tariffs generally create uncertainty in global markets, leading to a risk-off sentiment. This is particularly harmful to emerging markets like Indonesia, as investors tend to pull capital from riskier assets and move to safer havens. This could ostensibly trigger foreign outflows, weakening the IDR further in the ST.

Cohesive Monetary and Fiscal Policy Support Favorable Setting in Indonesia.

In our view, January marked a significant shift in the government's fiscal stance, addressing investor concerns over the rising supply of government debt, particularly following a last-minute adjustment to the VAT policy. Aside from BI’s recent rate cut which signal their switch to pro-growth policies, including continued reduction in the SRBI yield, the fiscal also on the move.

We note 3 main positive developments on the fiscal front:

Reducing Supply Risk. The government initially planned to issue IDR228tn in bonds through auctions in 1Q25, with an average of IDR20.7tn per auction. However, with foreign investors largely concerned about supply risk this year, limiting the potential for a significant decline in yields, the Ministry of Finance (MoF) has signaled a lower issuance pace, now averaging IDR18.7tn per auction. This adjustment has contributed to a decline in INDOGB yields, which recently fell below 7%.
Signaling Fiscal Discipline. President Prabowo, through Inpres No 1 2025, has mandated IDR306.7tn in spending cuts (8.4% from total fiscal spending) at both central and regional government levels, reinforcing a stance of fiscal prudence. The budget efficiency measures focus on non-essential expenditures, including ceremonial events, office operations, and official travel. While infrastructure spending is under review, details on specific project cuts remain unclear. However, key areas such as employee compensation, social assistance, and projects funded through loans or government Islamic bonds (SBSN) are exempt from reductions.
The budget cuts pave the way for an opportunity to expand the MBG program, allowing it to reach 40 million recipients in 2025. This expansion would require IDR100tn in funding, up from the initially budgeted IDR71tn. According to the Ministry of Finance (MoF), the broader coverage is expected to boost GDP growth by 0.7 percentage points, a significant jump from the initial estimate of 0.1 percentage points, hence, if implemented effectively, it could bolster this year’s growth outlook.

On the monetary front, in the latest auction, SRBI yields continued to decline, with the average yield falling to 6.71%, now below levels seen after the Sep-24 rate cut. Investor demand remains robust, reflected in a bid-to-cover ratio of 3.7x, likely supported by large SRBI maturities in January 2025. However, with lower SRBI maturities expected from February to April, we anticipate a more balanced bid-to-cover ratio in the coming months. BI continues its net liquidity injection, with total SRBI outstanding now below IDR900tn. Notably, SRBI maturities have outpaced issuances in both Dec-24 and Jan-25, contributing to ongoing liquidity improvements.

Capital Market – Continues Lower Yield. The 10-year US Treasury yield declined by 5 bps to 4.58%, while the 2-year yield also fell to 4.22%. Meanwhile the 10-year INDOGB yield dropped by 6 bps to 6.99%, reflecting a similar downward trend. The DXY strengthened by 0.78% w-w underpinned by more hawkish Fed as well as the new tariff announcement. As a result, the IDR dropped by 0.79%, closing at IDR 16,300/USD. Meanwhile, Indonesia’s 5-year Credit Default Swap (CDS) rose by 3 bps to 77 bps, indicating a slight increase in perceived credit risk.

Fixed Income Flow – Latest data from the Ministry of Finance (MoF) as of 30 Jan (Thursday) reported weekly net foreign inflows of IDR4.03tn into Government Securities (SBN), bringing total foreign ownership to IDR 879tn, with Month-to-date (MTD) inflows stood at IDR 2.11tn, mainly fueled by positive signal from the fiscal in regards of reduce supply risk and continue

fiscal discipline signal. In the banking sector, there was a weekly outflow of IDR40.64tn, though it recorded MTD inflows of IDR66.43tn. Bank Indonesia (excluding repo transactions) saw an inflow of IDR 34.83tn on a weekly basis but registered MTD outflows of IDR49.50tn. Meanwhile, the mutual fund sector recorded an outflow of IDR 0.09tn, whereas the insurance and pension fund sector saw an inflow of IDR 0.42tn.

Equity Flow - Foreign investors continued to reduce exposure to Indonesian equities, with outflows reaching IDR 511bn in the 5th short-week of January (Jan 30–31), bringing MTD outflows to IDR 3.8tn. Foreign sentiment remains cautious, with outflows were recorded in 14 of the last 15 trading weeks. The Jakarta Composite Index (JCI), declining by 0.8% w-w. The top five stocks receiving foreign inflows last week were BBRI, AADI, CUAN, BRIS, and INDF, indicating selective interest rather than broad-based confidence.

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