Just five months after hitting a record high, the benchmark stock index has tumbled 36% to become the worst performer this year among more than 90 global gauges tracked by Bloomberg. The rupiah has weakened more than 7%, while foreign investors have pulled billions of dollars from Indonesian bonds.
It marks a dramatic turn for a commodities-rich country that had been a staple allocation in many emerging-market portfolios. What’s unnerved investors is the more populist and interventionist agenda that President Prabowo Subianto has been pursuing — and steadily ratcheting up — in a nation long seen as friendly to foreign investors.
The big trade in Asia “is sell Indonesia,” said George Boubouras, head of research at hedge fund K2 Asset Management, which oversees about $4.3 billion. After decades of investing there, he exited all positions in 2024.
“I have zero exposure to Indonesia,” he said. “I won’t give them an opportunity.”
Since taking office in October 2024, Prabowo has pledged to boost annual growth to 8%, rolled out a nationwide free school meals programme, expanded the state’s role in the economy and channelled billions of dollars into the sovereign wealth fund Danantara. More recently, his move to take direct control of key commodity exports to curb tax evasion triggered a sell-off in exporter stocks.
For many investors, the departure last year of former Finance Minister Sri Mulyani Indrawati marked a turning point. Widely seen as a guarantor of fiscal discipline, she had reassured markets that Indonesia would maintain the conservative budget management that helped it earn investment-grade credit ratings and attract long-term foreign capital.
Now, investors are starting to question if those commitments still hold.
“Domestic political uncertainty is a typical EM risk that global investors tend to react to by staying on the sidelines until predictability re‑emerges,” said Yuxuan Tang, Asia head of rates & foreign-exchange strategy at JPMorgan Private Bank in Hong Kong. “We still advise caution at this stage.”
The rupiah has become the clearest expression of market anxiety, falling about 14% since Prabowo took office and ranking as Asia’s weakest currency this year.
It breached a historic 18,000-per-dollar level Thursday, and options markets signal further declines. Traders assign around a 45% chance it falls to 19,000 by December and a 27% probability of a slide to 20,000 one year from now.
“The core driver behind shorts in Indonesia is the bearish outlook for the rupiah, where investors remain concerned about macro imbalances and policy credibility, particularly on the fiscal side,” said Gary Tan, a portfolio manager at Allspring Global Investments, which oversees about $624 billion.
Pressure has spread beyond the currency market.
Foreign investors have cut their Indonesian sovereign debt holdings by 86 trillion rupiah ($4.8 billion), or about 9%, since last August. The bonds have lost more than 8% for dollar-based investors this year, compared with a 1.6% gain for emerging-market debt overall — despite repeated intervention by Bank Indonesia.
Another concern is the central bank’s growing ownership of government debt. Bank Indonesia now holds about 27% of sovereign bonds, an unusually high share for an emerging economy.
“What started as purchases to improve the bond market’s liquidity might have become more of a type of quantitative easing,” said Rajeev De Mello, a portfolio manager at Gama Asset Management SA, adding that investors want clearer guidance on whether those holdings have stabilised or are likely to rise or fall.
The selloff has also revived concerns about Indonesia’s sovereign credit profile. The country won investment-grade ratings from major agencies from around 2012 to 2017 after years of improving fiscal discipline. Some investors now worry that those hard-won gains could begin to unravel if confidence in policymaking weakens.
“They’re very hard to gain, very easy to lose,” said Shamaila Khan, the New York-based head of fixed income for emerging markets & Asia Pacific at UBS Asset Management. She manages an emerging markets fixed income fund that’s outperformed 93% of peers over the past three years.
“We want to see that they don’t jeopardise any of those policies, and the benefits they have received as a result,” she added.
MSCI Shock
Investors were dealt another blow earlier this year when MSCI Inc. said Indonesia could be downgraded from emerging market to frontier status, triggering one of the country’s worst stock-market routs in decades. The warning carried weight because the index compiler influences how billions of dollars are allocated globally.
The issues MSCI flagged predate Prabowo and reflect structural problems his administration says it wants to fix, including concentrated corporate ownership and lax regulatory oversight. Authorities have responded with tighter disclosure requirements and proposed changes to free-float rules, but the measures have done little to halt the selloff.
On Thursday, the benchmark index fell to its lowest since late 2020, extending this year’s losses to more than 30% on worries over Indonesia’s outlook and the potential for a sovereign credit-rating downgrade.
“I’m not convinced the shareholder disclosure will be transparent enough to change the real issue,” said Ana Isabel Gonzalez Encinas, chief investment officer at Farringdon Asset Management in Singapore, which started selling Indonesian stocks last year after being a long-term buyer. “If I can’t trust the plumbing, I don’t want to be the last one trying to get out.”
Prabowo and his government argue that the country needs more aggressive policies to escape the middle-income trap, move up the value chain and capitalise on its strategic position in global supply chains.
“The markets are not understanding me,” he said in a Bloomberg interview in March. “I just do what I think is in the best interests of my people.”
Beyond the policy shifts, markets are also grappling with execution risk. The government’s plans to take greater control of commodity exports, carry out spending programmes and pursue a corruption crackdown have left many unanswered questions about how the new frameworks will work in practice.
“What is unsettling investors is less the concept itself and more the lack of clarity around implementation,” said Mohit Mirpuri, a partner at SGMC Capital Pte.
Global investors have no lack of alternatives today. South Korea and Taiwan offer exposure to the AI boom; India may continue to attract long-term capital on growth and reform optimism, despite recent pressure on the rupee, while Brazil benefits from higher commodity and energy prices.
Maxence Visseau, founder of Arkevium Capital in Dubai, said the investment firm is underweight Indonesian stocks and that investors are “overwhelmingly cutting” exposure. “The domestic issues came first and are more structural. The Iran war is the accelerant.”
Not Broken Yet
To be sure, few investors believe Indonesia’s long-term story is broken.
The economy is still expanding by more than 5%, government debt remains relatively low and the country occupies a critical position in global supply chains as the world’s largest nickel producer. Its population of 280 million is young, growing and increasingly affluent.