Indonesia, Southeast Asia’s largest economy, is facing a significant investor exodus, triggered by a confluence of rising energy costs and the ambitious spending promises of populist President Prabowo Subianto. Foreign investors have pulled billions from Indonesian assets, pushing the national currency to record lows and making Jakarta’s stock market the worst performing this year. This flight of capital signals deep market apprehension over the nation’s fiscal trajectory and its standing as an emerging economy.
Market Turmoil and Fiscal Strain Deepen
Since the pandemic, Indonesia had maintained a steady annual growth rate of 5%. However, recent geopolitical events, specifically Iran’s closure of the Strait of Hormuz, exposed the economy’s vulnerability. Heavily reliant on imported fuel despite its own oil reserves, the Indonesian government immediately felt the impact. The cost of fuel subsidies, initially budgeted at around $22 billion (€19.2 billion), rocketed, with Reuters news agency reporting in March that policymakers would need an extra $6 billion or more to stabilize prices. This fiscal pressure contributed to the rupiah’s plunge of 8% to record lows near 18,000 to the dollar. The Jakarta stock market, which had been nearing a record above 9,000, plummeted by a third, marking it as the year’s weakest performer. Global funds sold a net $3.9 billion worth of Indonesian stocks this year, according to The Financial Times, representing the largest sell-off since just before the 1997-98 Asian Financial Crisis.
Populist Ambitions Meet Economic Reality
The market’s unease is compounded by President Prabowo Subianto’s expansive spending agenda. During his 2024 election campaign, Prabowo pledged to elevate economic growth to 8% through massive investments in housing, education, and health, amounting to trillions of rupiah. Since his election, he has also launched a new sovereign wealth fund, managing assets worth approximately $900 billion. While these initiatives garnered strong political and public backing, investors and economic experts expressed alarm. Rizal Shidiq, an economist at the University of Leiden in the Netherlands, characterized Prabowo’s policies as ‘overly ambitious’ and ‘inefficient.’ Shidiq told DW, ‘The market sees the President’s flagship programs as a significant strain on an already tight fiscal space,’ adding that the Hormuz closure made the spending plans appear ‘increasingly unsustainable.’ For years, Indonesia thrived on steady growth underpinned by prudent budgeting and a strict deficit ceiling of 3% of gross domestic product (GDP). Critics now argue that Prabowo’s government is leaning on larger deficits, potentially steering the country towards debt-fueled growth.
The Mounting Debt Burden
While Indonesia’s debt-to-GDP ratio stands at 40.75%, lower than many emerging-market counterparts, according to CEIC Data, the cost of servicing this debt presents a significant concern. Local media recently reported that close to a quarter of all tax receipts in 2026 would be allocated to interest payments—a ratio more than double that recommended by the International Monetary Fund. Furthermore, Jakarta lags behind Southeast Asian peers such as Thailand, Vietnam, and the Philippines in tax revenue collection. The nation also faces considerable refinancing pressure, with financial news outlet Kontan reporting that about 834 trillion rupiah ($46.1 billion, €40.3 billion) of government debt is set to mature this year. Arianto Patunru, a fellow at the Australian National University’s Indonesia Project, underscored the challenge, writing in a recent blog post, ‘The government is right to want faster growth… But ambition is not a substitute for credibility.’
Downgrade Threat Looms Large
These credibility concerns have not gone unnoticed by ratings agencies. Earlier this year, Moody’s and Fitch both revised Indonesia’s outlook to negative, citing the risks associated with Prabowo’s rapid spending push. In January, US-based finance company MSCI, whose benchmark index is widely used by investors, warned that Indonesia risked being downgraded from an emerging market to a frontier economy. MSCI specifically highlighted opaque ownership details of some Jakarta-listed companies and concerns over coordinated trading, which hinder investors’ ability to ascertain real share numbers and trust market prices. Adding to the embarrassment, S&P Global Ratings issued a similar warning last week (July 9, 2026), also citing transparency issues. Such a downgrade would be a severe blow to one of the G20’s fastest-growing economies, as many institutional investors avoid frontier markets. Shidiq emphasized to DW that a downgrade ‘would be severe… as the country would fall off the radar of investors specializing in emerging economies right when it badly needs to tap more capital to generate growth.’
Echoes of the Past
The fiscal woes stirring in Jakarta evoke memories of the 1997-98 Asian Financial Crisis, which delivered a harsh lesson on fiscal prudence to Indonesia. High debts, crony capitalism, and weak bank supervision made Indonesia one of the hardest-hit nations, leading to the rupiah losing over 80% of its value and the economy contracting by 13%, ultimately sparking riots that ousted then-President Suharto. While Jakarta is not currently at risk of repeating the excesses of those crisis years, investors are concerned that the hard-won lessons in stronger financial institutions and tighter regulation are being eroded. Siwage Dharma Negara, a senior fellow at the Singapore-based Institute of Southeast Asian Studies (ISEAS) – Yusof Ishak Institute, expressed skepticism that Prabowo would fully rein in his ambitions. Negara told DW, ‘I think populist spending will continue to expand faster than state revenue collection. With this current trend, markets will look at Indonesia as a high-risk destination.’ The country will likely struggle to achieve its 5% growth target this year, let alone the much-coveted 8%. Negara warned that investor confidence ‘can deteriorate quickly if governance concerns, fiscal risks and currency pressure reinforce each other like in 1998.’ Arianto Patunru went further, telling DW that if Prabowo fails to curb his exuberance, Indonesia’s economic fortunes risk moving from a ‘slow-motion loss to a free fall.’
