{"id":369018,"date":"2026-03-28T01:38:08","date_gmt":"2026-03-28T01:38:08","guid":{"rendered":"https:\/\/www.newsbeep.com\/ie\/369018\/"},"modified":"2026-03-28T01:38:08","modified_gmt":"2026-03-28T01:38:08","slug":"indonesias-perfect-storm-downgrade-fears-trade-tensions-and-now-the-iran-war","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/ie\/369018\/","title":{"rendered":"Indonesia’s ‘perfect storm’: Downgrade fears, trade tensions and now the Iran war"},"content":{"rendered":"

Airlangga Hartato was all smiles on Feb. 19 as he signed his name<\/a> to what he called a \u201cwin-win\u201d deal. After four trips to Washington, seven formal negotiating rounds, and nine meetings with U.S. Trade Representative Jamieson Greer, Indonesia\u2019s economy minister had finally secured a reduction in U.S. duties on Indonesian goods\u2014from a punishing 32% to a more tolerable 19%.<\/p>\n

The agreement, grandly titled\u00a0Toward a New Golden Age for the U.S.\u2013Indonesia Alliance, promised tariff exemptions for key exports like palm oil, coffee, cocoa, and rubber. In exchange, Jakarta pledged to scrap barriers on more than 99% of U.S. imports and commit to some $33 billion in purchases of American energy, aircraft, and agricultural products.<\/p>\n

The very next day, the U.S. Supreme Court struck down Trump\u2019s Liberation Day tariffs<\/a>\u2014including the original 32% levy that had forced Jakarta into the talks in the first place\u2014as unconstitutional. (Trump has since followed up with two new trade probes<\/a> on Indonesia, one on excess manufacturing and another on forced labor.)<\/p>\n

The Supreme Court\u2019s ruling was the most visible example of bad timing in what has been a punishing few months for Southeast Asia\u2019s largest economy, and an early test of President Prabowo Subianto\u2019s high hopes for his tenure.<\/p>\n

Since January, Indonesia has absorbed shocks from multiple directions at once. A warning from global index provider MSCI that Jakarta\u2019s opaque stock market could lose its coveted emerging-market status triggered an 8% drop in markets over two days. Moody\u2019s and Fitch both cut their outlooks on Indonesia\u2019s sovereign debt to negative\u2014the first step toward a possible downgrade. Trump\u2019s tariffs, if they return, could threaten Indonesia\u2019s export industries. Then came the Iran war, whose disruptions to the Strait of Hormuz threaten Indonesia\u2019s fuel supply.<\/p>\n

\u201cThe economy is heading into a perfect storm,\u201d says Siwage Dharma Negara, co-coordinator of the Indonesia Studies Program at the ISEAS\u2013Yusof Ishak Institute in Singapore. \u201cThis is something we\u2019ve never imagined before.\u201d<\/p>\n

\"\"President Trump\u2019s tariffs and Middle East policies have made life complicated for Indonesian President Prabowo Subianto.<\/p>\n

Fabrice COFFRINI\u2014AFP\/Getty Images<\/p>\n

So far, these back-to-back blows haven\u2019t hurt Indonesia\u2019s real economy. But higher commodity prices, a weaker rupiah, and a squeeze on government spending could hit affordability in a country where protests in response to rising fuel prices and the cost of living are already common. More broadly, analysts warn that Indonesia\u2019s push to give the state a greater role in the economy could hit business confidence and investment, just at the moment when Indonesia needs capital to grow its manufacturing and mining sectors.<\/p>\n

\u201cWe\u2019re in an unusual period where Indonesia\u2019s need for foreign capital is high, but its willingness to constrain itself in pursuit of that capital is low,\u201d says Mattias Fibiger, an associate professor at Harvard Business School who covers the Southeast Asian country.<\/p>\n

A \u201chuman capital\u201d president<\/p>\n

Prabowo Subianto took office in October 2024 with a bold target of 8% annual growth by 2029. He inherited a solid economy from his popular predecessor, Joko Widodo\u2014better known as Jokowi\u2014who had tried leveraging Indonesia\u2019s abundant natural resources through a \u201cdownstreaming\u201d drive: banning raw nickel ore exports and forcing investors to build smelters and refineries on Indonesian soil. That policy turned the country into a critical node in global battery and EV supply chains.<\/p>\n

Prabowo has sought to expand the state\u2019s role further still. \u201cIf you can think of Jokowi as a \u2018physical capital\u2019 president, then Prabowo is a \u2018human capital\u2019 president,\u201d Fibiger explains.<\/p>\n

Prabowo hoped to invest in expansive social programs, like a nationwide free nutritious-meals scheme\u2014now budgeted at roughly 335 trillion rupiah ($20 billion) for 2026, almost 9% of the total state budget, targeting 82 million schoolchildren, infants, and pregnant women.<\/p>\n

But it will take a long time for such programs to pay off, if they do at all. \u201cThose dividends will be felt a generation down the line, not a year, not three years, not five years down the line,\u201d Fibiger says.<\/p>\n

Negara is blunter, noting these measures \u201care not really contributing to productivity growth.\u201d<\/p>\n

Fibiger traces Indonesia\u2019s problems back to September, when Prabowo abruptly removed his widely respected finance minister, Sri Mulyani Indrawati, amid mounting protests over living costs and inequality. Sri Mulyani had served three presidents and was, in Fibiger\u2019s words, \u201ca personification of the Washington consensus,\u201d or a champion of fiscal discipline and market-oriented reforms.<\/p>\n

Her replacement, Purbaya Yudhi Sadewa, was more aggressive on spending, tapping some $12 billion of the country\u2019s reserves to recapitalize state-owned banks and pledging to use more than half of the government\u2019s \u201crainy day\u201d fund by the end of 2025.<\/p>\n

\u201cIndonesia has been a victim of both bad timing and bad policy,\u201d Fibiger says.<\/p>\n

Ratings shock<\/p>\n

Yet the first shock to the country came from a different source entirely. On Jan. 28, MSCI warned that it might downgrade Indonesia to a \u201cfrontier market,\u201d citing a lack of transparency over company ownership. Indonesia\u2019s markets have long featured companies with dominant controlling shareholders and limited public floats, allowing insiders to drastically move share prices.<\/p>\n

The market rout eventually wiped out $120 billion in value and forced out<\/a> not only the chief executive of the Indonesian Stock Exchange (IDX), Iman Rachman, but also the chair of the Financial Services Authority (OJK), Mahendra Siregar. Goldman Sachs downgraded Indonesian equities to \u201cunderweight\u201d and estimated that a drop to frontier-market status could trigger another $7.8 billion in outflows. Some local brokers warned that, in aggregate, more than $60 billion of foreign holdings could eventually exit if Indonesia were reweighted toward existing frontier peers.<\/p>\n

Jakarta moved quickly to try to head that off. OJK pledged to raise minimum free-float requirements to 15% and tighten disclosure of company owners. Danantara, Prabowo\u2019s new sovereign wealth fund, was mobilized to buy equities; the investment ceiling for pension funds and insurers was raised from 8% to 20% of assets.<\/p>\n

Pandu Sjahrir, Danantara\u2019s chief investment officer, a coal tycoon turned venture capitalist before joining the fund, says the IDX has \u201cimproved significantly\u201d since the MSCI\u2019s warning.<\/p>\n

\u201cHow do you find a good balance between being issuer-friendly and investor-friendly? You have to be in the middle,\u201d he says. A new IDX management team is expected in the second half of the year, and Pandu says he is \u201cencouraged\u201d by the caliber of applicants.<\/p>\n

But the market alarm proved to be only the first in a chain. Within weeks, both Moody\u2019s and Fitch downgraded their outlooks on Indonesia\u2019s sovereign debt to negative. Moody\u2019s cited \u201creduced predictability and coherence in the policymaking process,\u201d while Fitch pointed to \u201cgrowing centralization of policymaking authority.\u201d (While S&P hasn\u2019t changed its outlook, it too is wary of increased spending, noting that interest payments likely surpassed 15% of government revenue last year.)<\/p>\n

\u201cThe underlying concern is about imbalance between state revenue and the government\u2019s spending plans,\u201d says Negara. Indonesia\u2019s 2025 budget deficit reached 2.92% of GDP\u2014the widest in more than two decades, outside of the COVID-19 crisis\u2014pushing the country uncomfortably close to the 3% cap it adopted after the Asian Financial Crisis as a hard-won symbol of post-crisis discipline.<\/p>\n

~$1 trillion<\/p>\n

Assets managed by Danantara, Indonesia\u2019s new sovereign wealth fund<\/p>\n

$120 billion<\/p>\n

Market value lost by companies on Indonesia\u2019s IDX stock market, Jan. 29-30, 2026<\/p>\n

2.9%<\/p>\n

Indonesia\u2019s 2025 budget deficit as a share of GDP<\/p>\n

Sources: Danantara; S&P Global; Government data<\/p>\n

A U.S.-Israeli strike on Iran in February and March, which led to the closure of the Strait of Hormuz, makes things even more complicated for Indonesia\u2019s budget. (In another example of poor timing, Prabowo had just joined Trump\u2019s \u201cBoard of Peace\u201d to considerable fanfare, only to pause membership talks after the U.S. struck Iran.) Indonesia pumps around 608,000 barrels of oil a day, but surging domestic demand has made it a net importer since 2003.<\/p>\n

The price of petrol has long been a political pressure point in Indonesia, where successive governments have used generous subsidies to keep prices artificially low. Rising fuel prices tend to lead to mass protests\u2014as they did in 1998, eventually helping to topple Indonesia\u2019s then-dictator Suharto, and in 2022, when protesters looted Sri Mulyani\u2019s house.<\/p>\n

Jakarta has vowed to keep fuel affordable without imposing the lifestyle changes\u2014shorter workweeks, warmer air-conditioner settings\u2014that some of its Southeast Asian neighbors have rolled out, but has offered few specifics on how it will pay for that stance.<\/p>\n

In a mid-March interview with Bloomberg, Prabowo suggested he might lift the budget-deficit cap to deal with the short-term emergency of the Iran war and surging fuel prices. Pandu characterized the government\u2019s approach as only breaching the cap in \u201cspecial cases.\u201d<\/p>\n

Unease on Danantara<\/p>\n

Danantara, the sovereign wealth fund Prabowo launched in early 2025 with an estimated $1 trillion in state assets under its umbrella, sits at the center of investor unease about Indonesia. <\/p>\n

The fund was designed with a mandate to optimize returns from Indonesia\u2019s sprawling state-owned enterprises and recycle capital into projects that accelerate national development.<\/p>\n

\u201cWe have this dual role: How can we optimize assets from state-owned enterprises to create more value, and at the same time create quality jobs?\u201d CEO Rosan Roeslani explained to Fortune<\/a> last year.<\/p>\n

Yet in practice, Danantara has been pulled deeper into Indonesia\u2019s economy. Earlier this year, Prabowo ordered it to anchor the creation of a state-owned textile champion, backed by as much as $6 billion in capital<\/a>, to rescue an industry hammered by cheap Chinese imports and trade disruption. That\u2019s led to worries about confused objectives and mission creep. Others, like Negara, see Danantara as evidence \u201cthat the current administration is trying to strengthen the role of the state,\u201d which is worrying the private sector, particularly as the government intervenes in strategic sectors like retail, mining, and energy.<\/p>\n

\u201cThe market is asking us to be the anchor of confidence,\u201d Pandu says, noting Danantara\u2019s active engagement with MSCI and the rating agencies. \u201cWe\u2019re investing in the stock market every day through fund managers,\u201d he adds, helping to rebuild trust in a market that urgently needs it.<\/p>\n

\u201cIndonesia grows like a metronome, whether the rest of the world is facing a financial crisis or during boom times.\u201d<\/p>\n

Mattias Fibiger, Associate Professor, Harvard Business School<\/p>\n

At the same time, he acknowledges that Danantara cannot act like a purely commercial investor. \u201cIf I had to choose between a project that offered a 7% return and created 100,000 jobs, or one that offered a 10% return but created no jobs, I\u2019d have to take the 100,000 jobs option,\u201d he says. \u201cI have to make some profit, but I also have to generate high-quality work.\u201d<\/p>\n

Rather than the market turbulence or the fiscal squeeze, Pandu says his deepest concern lies elsewhere entirely\u2014with AI. \u201cMy biggest fear is being left behind in terms of global trends happening today, both in the U.S. and China. Those two countries are developing things that are rapidly changing the world order in terms of the haves and the have-nots,\u201d he says.<\/p>\n

The metronome economy<\/p>\n

Prabowo, a former army general, has been characteristically punchy in his response to foreign investors\u2019 jitters. \u201cThe markets are not understanding me,\u201d he griped to Bloomberg, insisting that analysts had \u201cgot it wrong\u201d and that domestic regulators had mishandled the MSCI warnings.<\/p>\n

The hard data give him some cover. Indonesia\u2019s economy grew 5.11% in 2025, its fastest pace in three years and above most analysts\u2019 expectations, supported by robust household spending and investment.<\/p>\n

Negara agrees there is still a solid floor beneath the current turbulence. Indonesia\u2019s growth has long been anchored by domestic demand rather than exports; a young, increasingly urban population; and a large, expanding middle class. \u201cIf domestic consumption is still growing, it means that there\u2019s still an opportunity for the economy to grow at 4% or 5% per year,\u201d he argues.<\/p>\n

\u201cThe consumer is still relatively strong and wealthy, and they\u2019re here to spend, especially the middle, upper middle class,\u201d says Pandu of Danantara. He thinks global investors are ignoring opportunities in everyday Indonesian consumption.<\/p>\n

Indonesia has been remarkably consistent. \u201cThe astonishing thing about Indonesia is that it grows like a metronome,\u201d Fibiger says. He points out that since the end of the Suharto era, Indonesia has posted roughly 5% growth year after year \u201cwhen commodity prices are high, when commodity prices are low, when the rest of the world is facing a financial crisis, or during boom times.\u201d<\/p>\n

\u201cIt doesn\u2019t seem obvious to me that today\u2019s problems will prevent Indonesia from growing around that number in the future,\u201d he adds, even if Prabowo\u2019s dream of 8% looks possible only with reforms.<\/p>\n

Beyond<\/a> consumption, Indonesia also offers opportunities in mining and metals, an increasingly hot sector as the world realizes the importance of critical minerals for industries like EVs and semiconductors. And then there\u2019s AI and data centers, which can take advantage of Indonesia\u2019s cheap and abundant energy supply, particularly as the country continues to invest in renewable energy.<\/p>\n

\u201cThis is a great opportunity to tell Indonesia\u2019s story,\u201d Pandu says. \u201cWe haven\u2019t done a great job at it, to be honest.\u201d<\/p>\n

This article appears in the April\/May 2026: Asia issue of Fortune with the headline \u201cIndonesia\u2019s market meltdown.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"Airlangga Hartato was all smiles on Feb. 19 as he signed his name to what he called a…\n","protected":false},"author":2,"featured_media":369019,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[72,113,61,1665,60],"class_list":{"0":"post-369018","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-economy","8":"tag-business","9":"tag-economy","10":"tag-ie","11":"tag-indonesia","12":"tag-ireland"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts\/369018","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/comments?post=369018"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts\/369018\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/media\/369019"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/media?parent=369018"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/categories?post=369018"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/tags?post=369018"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}