Domestic support strengthens as geopolitical risks ease

The latest development is positive for global financial markets as it reduces the risk of prolonged disruptions to energy supply chains, particularly through the Strait of Hormuz, which handles roughly a quarter of global energy trade. While operational challenges remain, including the normalization of shipping traffic and de-mining efforts in the Strait, the continuation of talks suggests a lower probability of renewed conflict in the near term.

The government announced a fiscal stimulus package worth IDR26.34tr for 2H26 to support domestic economic resilience amid elevated global uncertainty, particularly stemming from geopolitical tensions in the Middle East and potential disruptions to global trade and energy markets. The package combines measures to support household purchasing power, mobility, and industrial competitiveness, including transportation subsidies, food assistance for 33.24 million beneficiaries, vocational and apprenticeship programs, as well as import tariff reductions on LPG, plastic raw materials, and aircraft spare parts. In our view, the stimulus reflects the government's increasing focus on sustaining consumption and mitigating external risks, particularly as domestic demand shows signs of moderation and inflationary pressures from food and energy remain elevated. While the overall size remains relatively modest at around 0.1% of GDP, the package should help cushion growth in 2H26 and reinforce the government's broader effort to preserve economic momentum amid a more challenging global environment.