Indonesia’s crisis of confidence as markets decode Prabowo

INDONESIA spent much of the week ended Jun 7 confronting a question that might have seemed unthinkable a few short years ago: what happens when investors stop believing in South-east Asia’s largest economy?

The answer played out across trading screens around the world and at government offices in Jakarta. Stocks sank to their lowest levels since the pandemic, the rupiah breached the psychologically important 18,000-per-dollar level for the first time and rumours swirled that Finance Minister Purbaya Yudhi Sadewa was on the way out.

By the end of the week, Purbaya and senior government officials were on the defensive. “I’m not the type to quit,” Purbaya said at a state budget briefing on Friday (Jun 5). He was at pains to talk up the country’s fiscal position, saying the nation’s assets remain stable and inflows healthy.

“Optimism about the Indonesian economy remains strong,” he said. “Why are people saying the economy is heading toward a recession when economic stimulus is sufficient, liquidity is sufficient, and credit growth is also sufficient? Don’t be swayed by a single news report.”

But the damage was largely done. Investors increasingly see Indonesia as a market where policy uncertainty, political intervention and execution risks are beginning to outweigh one of the developing world’s most compelling long-term growth stories – a sentiment that has been growing since President Prabowo Subianto took office less than two years ago.

Investors are “concerned about the direction of policymaking in Indonesia,” Jason Tuvey, deputy chief emerging markets economist of Capital Economics, said. “Especially so, after widespread protests in the middle of last year led to the sacking of respected finance minister Sri Mulyani Indrawati. Since then, the government has adopted increasingly populist and interventionist policies.”

Speculation over Purbaya’s departure was not the only thing sending markets into a tailspin. There were also mounting concerns over the government’s economic management, confusion regarding new commodity export rules and a widening corruption investigation involving Prabowo’s flagship US$15 billion free meals programme.

Rising oil prices driven by the conflict in the Middle East are also adding to pressure on Indonesia’s economy, forcing the government to spend more on fuel subsidies while facing higher import costs for crude oil and LPG. Like several of its South-east Asian neighbors, Indonesia imports a significant share of its crude from the region, making it particularly vulnerable to supply disruptions and price shocks.

“Indonesia isn’t alone in Asia in feeling considerable financial market pressure but in its case, the global energy shock has seemingly brought pre-existing concerns about the fiscal outlook and institutional dynamics more sharply into investors’ focus,” said Peter Mumford, who heads the South-east Asia practice of Eurasia Group. “While the government has been sending stronger signals about fiscal discipline recently with the aim of reassuring investors, new policies have created more uncertainty.”

Indonesia’s benchmark stock index has now fallen more than 35 per cent in 2026, making it the worst-performing major equity market tracked by Bloomberg. The rupiah has dropped roughly 14 per cent since Prabowo took office and is Asia’s weakest currency in 2026. Foreign investors have cut holdings of Indonesian sovereign bonds by about 86 trillion rupiah (S$6.7 billion) since August 2025.

The plunging currency is also making the repayment of US dollar-denominated debt a daunting prospect.

According to data compiled by Bloomberg, the government and companies in Indonesia have some US$12.6 billion of foreign currency bonds due in 2027 and US$11.3 billion to US$16.3 billion in each of the four years thereafter. The government has issued more than US$11 billion in foreign-currency notes so far in 2026, the data show.

Putting additional downward pressure on the rupiah, according to Mumford, is Bank Indonesia’s expanded growth mandate. The parliament on Thursday passed revisions to a sweeping financial-sector law that grants it power to conduct performance evaluations of Bank Indonesia, the Financial Services Authority and the Deposit Insurance Agency.

That “risks exacerbating concerns about institutional independence,” Mumford said.

For many, the current turbulence is not the result of a single week but the cumulative effect of a series of policy shifts under Prabowo, who this week kept largely out of sight and mum on market developments.

Since taking office, the former defence minister has pursued a far more interventionist economic agenda than many anticipated. He has expanded the state’s role in strategic industries, seized some 4 million hectares of palm oil plantations, mine concessions and processing facilities – an area roughly the size of Switzerland – channelled billions of dollars into sovereign wealth fund Danantara and repeatedly emphasised the need for stronger government direction of economic activity.

Supporters argue such measures are necessary if Indonesia is to escape the middle-income trap and accelerate economic growth toward Prabowo’s stated target of 8 per cent. “There’s a false impression that fiscal policy is being poorly managed,” Purbaya said on Friday. “All of the president’s policies have been calculated accurately and in detail by the president and us.”

But investors see a huge expenses bill.

The departure in 2025 of Sri Mulyani removed one of the market’s most trusted advocates of fiscal discipline. Since then, concerns have mounted about rising government spending, the sustainability of Indonesia’s fiscal framework and the independence of key economic institutions.

Those worries deepened this week when Prabowo revealed he had ordered an investigation into alleged misconduct at the National Nutrition Agency after receiving reports of irregularities. He subsequently dismissed agency head Dadan Hindayana and his two deputies, and the three are now detained as part of a corruption probe. They could not be reached to comment.

Prabowo sought to turn the free meals scandal into evidence of his anti-corruption credentials, warning officials in a speech in West Java on Wednesday evening that “my eyes and ears are everywhere” and pledging unlimited support for law enforcement agencies pursuing graft cases.

The president is also seeking to reduce leakage along Indonesia’s borders, shocking his own officials with the creation late in May of a new state entity under Danantara to oversee Indonesia’s world-leading exports of palm oil, coal and ferro-alloys, which together amounted to more than US$65 billion in 2025. 

Commodity exporters have been scrambling to understand how the new rules will work. While implementation formally began in June, industry groups say crucial details remain unclear.

On Friday, the government at least released a much-anticipated list of commodities subject to the regime, showing the rules will capture most of its major palm oil products in addition to coal and ferronickel. Full implementation of the policy is due by Jan 1, 2027.

But the uncertainty is already having real-world consequences.

Some coal exporters have delayed shipments while awaiting clarification and Chinese buyers have reportedly postponed deliveries. Palm oil traders say overseas customers are raising concerns about payments and product specifications under the new arrangements.

The episode has only reinforced the broader criticism being voiced by investors – Prabowo’s unpredictability, compounded by uncertainty about policy direction and then implementation, make Indonesia an increasingly hard sell.

If the government remains on its current policy path, even interest rate hikes will not be enough “to prevent a further widening of risk premia on Indonesian assets,” Capital Economics’ Tuvey said. All up, it amounts to a “deterioration in the economy’s long-term prospects.” BLOOMBERG