TOKYO \u2013 Indonesian officials are working overtime to dismiss any suggestion that Jakarta is catching a whiff of 1997 in the air. But the force of their interventions to steady the rupiah tells a very different story.<\/p>\n
Bank Indonesia is\u00a0hemorrhaging currency reserves to put a floor under the rupiah, which recently fell to an all-time low. This includes levels seen\u00a0during the Asian financial crisis 29 years ago, as the fallout from the Iran war\u00a0slams global markets.<\/p>\n
Yet Indonesia\u2019s move to impose capital controls<\/a> suggests Southeast Asia\u2019s biggest economy is going to the mattresses against currency speculators \u2014 in ways that could backfire.<\/p>\n Next week, Indonesia will activate a Bond Stabilization Fund to support the rupiah, according to Finance Minister Purbaya Yudhi Sadewa. Yet Jakarta resorting to so-called capital-flow management tools this early in the battle smacks more of panic than strength.<\/p>\n To be sure, the rupiah\u2019s plunge to around 17,400 to the dollar is dramatic and a clear and present threat to the economy. A weaker exchange rate makes it harder to keep up with overseas debt payments.<\/p>\n It ups the odds Indonesia will import inflation. And it complicates the export of coal, nickel, palm oil and other key commodities, all of which are priced on global markets in dollars.<\/p>\n But there\u2019s a throw-the-baby-out-with-the-bathwater dynamic at play in Jakarta. The capital outflows exiting Indonesia reflect investors voting with their feet against the priorities that President Prabowo Subianto has pursued since October 2024.<\/p>\n The twin budget and current-account deficits are surely part of the problem. But the biggest worry is the yawning gap between Prabowo\u2019s reform promises<\/a> and the actual macroeconomic policies he\u2019s championed.<\/p>\n It\u2019s fine that Prabowo embraced the mega\u2011infrastructure agenda of his predecessor, Joko Widodo. But global investors have been left wanting for new projects that boost productivity. They also prefer financing arrangements that don\u2019t crowd out private investment while exacerbating the national debt.<\/p>\n Nor is economic nationalism a good look for a government seeking to increase its regional leadership role. This includes export restrictions on nickel and other minerals that unsettle global supply chains and regulatory volatility that raises risk premiums.<\/p>\n Prabowo, meanwhile, has done little, if anything, of note to reduce Indonesia\u2019s reliance on commodities to generate growth. This dynamic exposes the nation\u2019s\u00a0287 million people<\/a>\u00a0to extreme price swings.<\/p>\n Team Prabowo<\/a> has done itself no favors by dismissing investors\u2019 concerns. Its heavy foreign-exchange intervention and pressure on state-owned banks are exacerbating these worries. Indications of bigger spending efforts to come aren\u2019t helping.<\/p>\n It seems markets are no longer buying what Team Prabowo is selling. The rupiah\u2019s plunge \u201cis a signal that macroeconomic fundamentals are under pressure,\u201d says Liza Camelia Suryanata, head of research at Kiwoom Sekuritas Indonesia.\u00a0Also, Suryanata notes, \u201cthe target of 8% GDP growth has become highly unrealistic, and even maintaining around 5% is starting to look difficult.\u201d<\/p>\n Nor is Suryanata surprised that the Jakarta Composite Index is\u00a0down nearly 19%\u00a0<\/a>year to date. That compares to positive year-to-date returns in Malaysia<\/a> and Thailand and a Philippine stock market that\u2019s essentially flat.<\/p>\n In late April, index giant MSCI extended its review of\u00a0Indonesia\u2019s stock market to determine whether it might be downgraded to \u201cfrontier\u201d from \u201cemerging\u201d status amid growing concerns about transparency under Prabowo.<\/p>\n Since January, Jakarta has announced steps to increase the amount of shareholder data\u00a0\u2060and doubled the portion of stocks available to the general public to 15%. The exchange also kicked out<\/a>\u00a0some tycoon-owned stocks.<\/p>\n Last month, Jeffrey Hendrik, acting CEO of the Jakarta exchange, said his team would \u201ccontinue to engage with global investors to gather input on strengthening the capital market in the future.\u201d<\/p>\n Indonesia\u2019s troubles are much deeper than that.\u00a0Nor is it the only Asian economy in harm\u2019s way. The Indian rupee, for example, is down by even more year to date than the rupiah (down 5.1%<\/a>\u00a0and\u00a04.1%<\/a>, respectively).<\/p>\n \u201cEmerging market Asia is in the direct path of the shock with relatively loose policy,\u201d says economist Lucila Bonilla at Oxford Economics, noting that Oxford has added rate hikes to its baseline for\u00a0India,\u00a0Indonesia\u00a0and the Philippines. Thailand, meanwhile, is the \u201cstandout risk of patience turning into complacency.\u201d<\/p>\n Indonesia, though, was shaky well before bombs began falling on Iran on February 28.\u00a0Even before the war began, the rupiah and the stock market were suffering their worst routs since the 1997-98\u00a0Asian crisis, flashing warning signs for developing markets across Asia. It was clear in January that markets had grown wary of general-turned-politician Prabowo\u2019s policies.<\/p>\n When Prabowo succeeded the more reform\u2011minded Widodo, he inherited an economy that had been gathering momentum. Between 2014 and 2024, the widely popular Widodo restored stability to Indonesia\u2019s political landscape and notched several meaningful reforms \u2014 most notably a wave of transformational infrastructure projects designed to lift productivity<\/a> and competitiveness.<\/p>\n In the Widodo era, Indonesia also made headway in tackling corruption and bureaucratic inefficiency, pushing government institutions toward greater transparency. These improvements helped raise the quality of growth, ensuring that more Indonesian households shared in the gains from rising output.<\/p>\n And under Widodo\u2019s stewardship, Indonesia navigated the Covid\u201119 shock more effectively than many of its emerging\u2011market peers. Yet for all his achievements, Widodo left important structural issues unresolved.<\/p>\n Critics say he tolerated the rise of dynastic politics and allowed old\u2011style patronage networks to persist. And by backing a successor from the armed forces, he opened the door to a far less predictable leadership style \u2014 a striking shift given that Widodo was Indonesia\u2019s first president from outside the military or political elite.<\/p>\n Global investors felt the jolt almost immediately after Prabowo took office. His pledge to propel Indonesia\u2019s US$1.4 trillion economy toward 8% annual growth initially rekindled foreign enthusiasm.<\/p>\n But that optimism evaporated once it became clear that his strategy relied on aggressive fiscal expansion. Capital outflows surged as investors reassessed the risks behind the new administration\u2019s growth ambitions.<\/p>\n Nine months into his presidency, in September 2025, Prabowo abruptly dismissed the internationally respected Finance Minister Sri Mulyani Indrawati<\/a>. A former World Bank managing director, she had long been viewed as the key guardrail against a return to fiscal overreach.<\/p>\n Once she was out, Prabowo installed loyalist Purbaya, who quickly injected roughly $12 billion into the economy to jump-start lending.<\/p>\n Purbaya then moved swiftly to advance Prabowo\u2019s controversial \u201cburden\u2011sharing\u201d plan \u2014 a push to nudge the central bank toward looser monetary policy just as the government was flooring the fiscal accelerator.<\/p>\n Economists worry BI is becoming a mere extension of the president\u2019s growth strategy. ANZ Banking Group strategist Jennifer Kusuma notes that BI\u2019s growing role in the sovereign debt market \u201cwould foster moral hazard risks\u201d going forward.<\/p>\n In late January, as the Indonesian rupiah plunged to a record intraday low, Purbaya issued a statement stressing that BI remains free to make its own calls.<\/p>\n \u201cWe will maintain the independence of the central bank and the government as much as possible,\u201d Purbaya said. \u201cI will not squeeze the central bank to finance our development programs.\u201d<\/p>\n The folks at MSCI clearly aren\u2019t persuaded. In January, the index provider warned of \u201cfundamental investability issues\u201d in Indonesia\u2019s stock market<\/a> \u2014 a statement that triggered one of the most dramatic selloffs since the 1990s. It amounted to a stinging rebuke of Prabowo\u2019s hyper-positive economic spin.<\/p>\n Many investors now fear it\u2019s too late to give Prabowo the benefit of the doubt. Instead of taking steps to strengthen Indonesia\u2019s economic foundations and rebuild market confidence, his finance minister has taken to attacking economists in a style reminiscent of Donald Trump, further unsettling global funds.<\/p>\n Just as Trump lashed out at Goldman Sachs\u2019 chief economist for not toeing his administration\u2019s line, Prabowo\u2019s team has publicly chastised Citibank analysts<\/a> after a report warned that Indonesia\u2019s budget deficit could widen to 3.5% of GDP \u2014 well above the legal 3% ceiling.<\/p>\n Purbaya veered into Trump\u2011style theatrics when he dismissed Citi\u2019s forecaster \u2014 who holds two master\u2019s degrees \u2014 as \u201cnot a real economist.\u201d But you don\u2019t need a PhD to see that investors aren\u2019t brushing off Citi\u2019s warning. Least of all MSCI, which has treated the concerns as anything but trivial.<\/p>\n Yet as MSCI continues to argue months later, only bold and transparent capital-market reforms can achieve that. MSCI raised concern about \u201congoing opacity in shareholding structures\u201d and \u201cpossible coordinated trading behavior that undermines proper price formation.\u201d<\/p>\n The bigger problem is that by prioritizing political control over creating a more productive\u00a0economy<\/a>,\u00a0Prabowo\u00a0and his economic team may be dragging the economy back to the days of living dangerously.<\/p>\n The irony, of course, is that Prabowo is a protege of dictator Suharto, who was ousted amid the political chaos of the 1997-1998 financial crisis. Without supply-side reforms, Prabowo\u2019s\u00a0fiscal priorities will also adversely affect the economy.<\/p>\n The same goes for the president\u2019s assault on the central bank. Indonesia, in many ways, has joined the Fed on the frontlines of the battle for monetary policy autonomy.<\/p>\n The risk, says Wijayanto Samirin, economist at Paramadina University, is that BI officials \u201cget too deep and detailed into fiscal matters and this disrupts our monetary policy ecosystem.\u201d<\/p>\n Prabowo\u2019s push to weaken the central bank\u2019s independence and roll out costly populist programs suggests a shaky grasp of the very forces that fueled Indonesia\u2019s 1997\u201398 crisis.<\/p>\n And despite the cautionary tale of Malaysia\u2019s 1Malaysia Development Berhad<\/a> scandal, he has pressed ahead with creating a sovereign wealth fund, Danantara<\/a> \u2014 a move that has already raised red flags over governance risks and potential conflicts of interest.<\/p>\n Markets aren\u2019t always right. But chaotic stock losses and rupiah volatility have investors sensing a 1997-like whiff in the Jakarta air. This places the onus on Prabowo to demonstrate that he has a plan to take Indonesia forward.<\/p>\n Current fears about an accelerating backslide are the last thing the nation needs in 2026. And moves to limit capital flows treat the symptoms, not the underlying problems.<\/p>\n Follow William Pesek on X at @WilliamPesek<\/p>\n","protected":false},"excerpt":{"rendered":"TOKYO \u2013 Indonesian officials are working overtime to dismiss any suggestion that Jakarta is catching a whiff of…\n","protected":false},"author":2,"featured_media":658894,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[267046,64,63,7025,99,140631,164,4805,318412,196120,28399,49944,196123,318413],"class_list":["post-658893","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-1997-98-asian-financial-crisis","tag-au","tag-australia","tag-block-2","tag-business","tag-danantara","tag-economy","tag-indonesia","tag-indonesia-capital-controls","tag-indonesia-economy","tag-msci","tag-prabowo-subianto","tag-rupiah-depreciation","tag-rupiah-record-low"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/658893","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=658893"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/658893\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/658894"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=658893"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=658893"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=658893"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}