US deficit breaks records: forecast jumped by $200 billion
The Congressional Budget Office updates its deficit estimate for fiscal year 2026 to $2.1 trillion, following a sharp decline in customs revenues. Julius Baer economists analyze the implications for the markets. Also: leadership changes at the Central Bank of Indonesia.
Economists at the wealth management bank Julius Baer have released an economic review focusing on the fiscal situation in the US and the outlook for policy in Indonesia.
Afonso Borges, Fixed Income Research at Julius Baer, stated: "The increase in the deficit for fiscal year 2026 is explained by customs refunds and calendar effects. With forecasts for fiscal years 2027 and 2028 remaining largely unchanged, the latest data do not fundamentally alter the Treasury's medium-term funding outlook."
In its July monthly budget review, the Congressional Budget Office (CBO) raised its deficit estimate for fiscal year 2026 to $2.1 trillion, $200 billion above the February forecast. The revision is almost entirely on the revenue side: expected customs and tariff revenues are about $250 billion lower due to a Supreme Court ruling regarding IEEPA tariffs, partially offset by a $75 billion increase in personal income and payroll tax revenues.
The deficit for the 12 months through July stood at approximately $1.9 trillion, or about 6% of GDP. Adjusting for payments brought forward from August lowers this by about $100 billion. The deficit remains consistent with fiscal year 2025 and slightly below the 6.3% recorded in fiscal year 2024, though it remains nearly double the 3% target set by Treasury Secretary Scott Bessent.
Magdalena Tao, Asia Fixed Income Analyst at Julius Baer: "The sole appointment of Destry Damayanti as the new head of Bank Indonesia (BI) should provide relief to the markets, given expectations for policy continuity and commitment to IDR stability. Investors will monitor her ability to balance President Prabowo's growth targets with maintaining Central Bank independence."
Indonesian President Prabowo Subianto on Monday appointed acting BI Governor Destry Damayanti as the sole candidate for Central Bank Governor following the surprise resignation of Perry Warjiyo on July 27, 2026.
Damayanti, who has served as Senior Deputy Governor since 2019, is widely seen as the leading candidate due to her market credibility. Parliamentary approval is expected quickly, which would make Damayanti the first woman to hold the position of BI Governor.
Indonesia posted resilient GDP growth of 5.3% year-on-year in the second quarter, exceeding market expectations of 5.1%, though slower than the 5.6% recorded in the first quarter. Growth momentum may moderate in the second half of the year amid higher credit costs following BI's 100-basis-point cumulative rate hike in May and June, and the fading impact of fiscal stimulus. Inflation slowed to 2.9% in July, compared to 3.3% in June.
