[JAKARTA] Indonesia’s financial markets have bounced back after a torrid few months, sparking a debate on whether the rally can last.

RBC BlueBay says any inflows into Indonesian bonds will remain tactical until there’s more clarity on how the government will fund its growth plans, while Mirae Asset Sekuritas Indonesia warns that the recent rally in equities has run ahead of fundamentals. Indonesia’s currency has climbed some 4 per cent since hitting an all-time low in April, while sovereign notes recorded the biggest monthly inflow this year in May.

The signs of caution about Indonesia’s market recovery speak to global uncertainties from US President Donald Trump’s rapidly evolving trade policy. They also reflect persistent worries about fiscal discipline in South-east Asia’s largest economy and questions over how sovereign wealth fund Danantara will operate.

“I wouldn’t say there is a rethink yet on rupiah assets,” said Zhenbo Hou, portfolio manager at RBC BlueBay in London. “Risks around Indonesia have not changed since the first quarter. A lack of clarity around funding Danantara and how it intends to implement investment remains key.”

Debate is growing on whether Indonesian assets have reached an inflection point after initial signs of a recovery.

Global funds snapped up US$1.5 billion of Indonesian government bonds in May while the rupiah gained 1.9 per cent – the best performance for both assets in 2025. Foreign inflows into the nation’s equities turned positive for the first time since September last month as the benchmark Jakarta Stock Exchange Composite Index (JCI) entered a bull market.

But some analysts warn that the gains will fizzle out as recent trade and manufacturing data suggest that Indonesia’s economic momentum remains lacklustre.

“The JCI rally happened too fast and has yet to reflect our economic fundamentals,” said Rully Arya Wisnubroto, head of research and chief economist at PT Mirae Asset Sekuritas. “We expect GDP growth in the second quarter to be lower than the first quarter’s. We recommend maintaining a cautious stance in the equity market.”

A lot of the jitters are centred around the government’s finances, reflecting concerns that have roiled bond markets worldwide in recent weeks.

Indonesian President Prabowo Subianto has implemented a free lunch programme for students that will cost US$30 billion a year, the equivalent of 14 per cent of the government’s entire 2024 budget. To pay for that, he cut back spending in other areas such as travel and infrastructure projects.

State revenue collections were 12.4 per cent lower for the January to April period compared to a year earlier, while expenditures dropped 5 per cent, according to Bloomberg’s calculation based on budget figures from the same period in 2024.

Analysts have cautioned that Prabowo’s policies may push Indonesia’s budget deficit closer to its legal limit of 3 per cent of gross domestic product.

To top it all off, there are worries that Danantara, whose board includes a number of individuals with political and business links, could make investment decisions that are influenced by politics. The Prabowo administration has sought to address these concerns after Moody’s Ratings and Fitch Ratings warned that a lack of clarity surrounding the fund’s operations and governance raises potential risks to the fiscal outlook.

The gains in Indonesian assets come amid a broader pivot away from the US as worries about Washington’s budget shortfall and the impact of tariffs on growth deter investors. A Bloomberg US dollar gauge has fallen over 8 per cent from the year’s high reached in February, helping to make emerging-market assets more attractive.

Rupiah bonds have also been boosted by Bank Indonesia’s monetary easing, and Allianz Global Investors sees policymakers reducing borrowing costs by at least another 25 basis points. The money manager remains bullish on the notes although it’s watchful of developments on the fiscal front, according to Ze Yi Ang, a senior portfolio manager for Asian fixed income in Singapore.

But some market watchers are wary even though a US$1.5 billion stimulus package is set to kick in this month, as authorities look to boost consumption to help the economy grow about 5 per cent in the second quarter.

The expenditure “is unlikely to fully offset underlying economic pressures on earnings”, Malayan Banking analysts Jeffrosenberg Chenlim and Jocelyn Santoso wrote in a Jun 3 note. “Markets may also be underpricing the risk of a more aggressive tariff stance by President Trump amid growing criticism of his perceived indecisiveness. In light of these risks, we recommend clients consider tactical profit taking.” BLOOMBERG