Trade Deficit and Rupiah Stability in Focus as Foreign Capital Becomes Key to Market Recovery

Indonesia recorded a trade deficit of US$1.61 billion in May 2026, marking the country's first monthly deficit after 72 consecutive months of trade surpluses. The reversal highlights a shift in the country's external trade performance as exports weakened while imports remained resilient.

The deterioration was largely driven by falling exports. Export value declined 8.30% from the previous month and contracted 5.73% compared with the same period last year. Crude palm oil (CPO) was among the biggest contributors to the decline, with shipments dropping 26.85% on a monthly basis.

Economists Jennifer Calysta Farrell and Victor George from PT Bank Central Asia Tbk. attributed the weaker CPO exports to several factors. Adverse weather conditions, higher fertilizer prices that reduced usage and affected productivity, and softer demand from major buyers including India, China, and the United States all contributed to the slowdown.

Looking ahead, BCA believes Indonesia's export outlook remains challenging. Tighter monetary policy from the U.S. Federal Reserve and other major central banks could continue weighing on global demand. At the same time, the implementation of the B50 biodiesel program may divert more CPO toward domestic consumption, reducing export availability. Additional uncertainty also comes from potential policy changes affecting coal and nickel production and exports, as well as the possible impact of Danantara Sumberdaya Indonesia on June's trade performance.

On the import side, BCA expects demand to remain relatively strong. Elevated government spending is likely to offset part of the negative impact of currency depreciation on domestic purchasing activity. As a result, the combination of weaker exports and resilient imports could continue putting pressure on the rupiah, prompting Bank Indonesia to raise its benchmark interest rate by a cumulative 50 basis points this year.

Despite those concerns, the rupiah opened Friday's trading session stronger against the U.S. dollar, appreciating around 0.27% to approximately Rp17,940 per dollar after closing at Rp17,988 the previous day. The improvement coincided with a slight decline in the U.S. Dollar Index to around 100.803, providing support for several emerging-market currencies.

Trimegah Sekuritas Indonesia Chief Economist Fakhrul Fulvian believes recent rupiah weakness should not be interpreted as a sign of deteriorating economic fundamentals. Instead, he views it as part of the financial market's adjustment process following Bank Indonesia's monetary tightening and liquidity management measures.

According to Fakhrul, encouraging signs have already begun to emerge, particularly through the return of foreign investors to Indonesia's government bond market. The renewed interest suggests that investors are responding positively to policy adjustments designed to improve market liquidity and restore healthier bond price formation.

He emphasized that exchange-rate stabilization requires time because it depends heavily on sustained portfolio capital inflows. Government bonds remain the primary gateway for foreign investment into Indonesia's financial markets, making competitive bond yields essential for attracting global investors amid elevated international uncertainty.

Fakhrul also stressed the importance of close coordination between Bank Indonesia and the Ministry of Finance. Consistent policy implementation would allow bond yields to adjust naturally to market conditions while improving Indonesia's competitiveness relative to other emerging markets. Any premature policy reversal, however, could delay foreign investor participation and weaken the stabilization process.

In his assessment, Indonesia has already moved beyond the period of intense market pressure and entered a stabilization phase. The next objective is to encourage stronger foreign participation in the government bond market, strengthening balance in the foreign exchange market and providing additional support for the rupiah.

Rather than introducing new intervention measures, Fakhrul argues that maintaining policy consistency is now the highest priority. If investors remain confident that monetary and fiscal authorities will continue implementing market normalization, foreign capital inflows are expected to increase and provide a more durable foundation for the Indonesian currency.

Although exchange-rate volatility will continue to be influenced by global developments, particularly expectations surrounding future Federal Reserve policy decisions, Fakhrul believes downside risks for the rupiah have become more limited than they were several months ago. The longer-term challenge is to reinforce investor confidence and re-establish Indonesia as one of the region's leading destinations for portfolio investment, allowing stronger capital inflows to support sustainable currency stability.