Fiscal policy finds its balance. We now expect a fiscal deficit of 2.8% of GDP in 2026, lower than 2.9% in 2025. This reflects lower oil price assumption of USD83/bbl from USD92/bbl which should reduce the subsidy burden sharply and budget cuts for ministerial spending including free meal programs. We still expect lower revenue shortfall as commodity prices will still be higher than budget assumptions. We forecast a fiscal deficit of 2.9% of GDP in 2027, higher than MOF initial guidance 1.8-2.4%.
Growth softens, stays resilient. We continue to expect a slight pick up in GDP growth of 5.3% in 2026 from 5.1% in 2025. However, we expect growth momentum to slow to an average 5.2% in 2H from an expected 5.4% in 1H. We believe fiscal support to normalize with the budget efficiency and fading low base effects. Indeed, our Mansek Economic Pulse Index has signaled a moderation in 2Q. We also expect the net export contribution to turn negative this year, reflecting weak global demand. In 2027, we expect GDP growth to improve further to 5.4%.
CA pressures to ease. We continue to forecast a current account deficit of 1.4% of GDP, up from 0.1% in 2025, mainly reflecting higher oil imports, lower commodity export volumes, and strong domestic demand. After a likely widening of CAD in 2Q to 2.7% of GDP from 1.1% in 1Q, we expect it to improve to an average 1% in 2H. We forecast a CA deficit of 1% of GDP in 2027, reflecting lower oil prices and improved global demand.
Rupiah catches a break, risks linger. We now expect Rupiah to average 17,600 in 2026, still reflects 6.7% depreciation from end of last year. In terms of trajectory, we expect Rupiah to average 17,800 in 3Q after a sharp jump to 17,700 in 2Q, partly due to dividend repatriation seasonality and oil shock. Ahead, less trade balance pressures from lower oil prices should help ease pressures Rupiah coupled with improved local news flow sentiment. We nonetheless assume DXY to average higher 103 in 2H vs 97 in 1H, reflecting Fed hike expectations. In 2027, we expect Rupiah to average 18,100.
BI hikes continue, cuts wait on the Rupiah. We now expect BI hiking cycle to stay longer due to likely sustain Rupiah pressures. As such we forecast another 25bp hike to 6.00% in 2026 as we also assume Fed to deliver one 25bp hike in 4Q. We also expect stronger inflationary pressures in 2H from higher prices from El Nino and cooking oil from B50 implementation. With BI focusing more on FX stability and uncertainty from MOF excess cash balance management in SOE banks, we expect a short-term liquidity tightness in the banking system. In 2027, we expect BI to hike another 25bp to 6.25% in 2027 before easing to 5.5% in 2H.
