Indonesian economy struggles for air, investor confidence wavers amid policy concerns

Indonesia's economy is navigating a difficult period marked by high energy prices and a decline in investor confidence. The nation, a net oil importer, has been significantly impacted by rising global crude prices, exacerbated by the conflict in the Middle East. To mitigate the impact on its citizens, the government maintains costly fuel subsidies and a large school meal program, which has drawn criticism for its expense and alleged role in food poisoning incidents.

“

investor concerns over recent domestic policy moves will persist

Investor sentiment has been further unsettled by the government's implementation of tighter export controls, described as "resource nationalism," and parliamentary moves to increase oversight of the central bank, sparking concerns about its independence. These factors have contributed to the rupiah's sharp depreciation, reaching record lows against the US dollar. The stock market has also suffered, losing a substantial portion of its value since early 2026, with traders increasingly divesting from Indonesian assets.

“

Given that investor concern over domestic policy has not been resolved, we expect depreciatory pressure on the rupiah to persist

While recent interest rate hikes by the central bank have provided some temporary relief to the currency and markets, analysts believe underlying investor concerns about domestic policy will persist. BMI, a unit of Fitch Solutions, noted that the rupiah remains significantly weaker than before the Middle East conflict began. The firm predicts continued downward pressure on the rupiah, likely necessitating further rate increases from Bank Indonesia, which could in turn dampen economic growth.

“

We have to grow higher to become a rich country by 2045. Otherwise we are... going to be trapped in the middle-income countries group.

Despite these challenges, the government remains committed to its ambitious growth target of eight percent by 2029. Deputy Finance Minister Juda Agung emphasized the necessity of high growth to avoid becoming a "middle-income trap" and achieve developed country status by 2045. He defended the central bank's independence and its recent rate hikes, acknowledging potential risks to growth and increased debt servicing costs. However, external analysts suggest that stabilizing the rupiah requires a fundamental shift away from populist and interventionist policies towards a more investor-friendly approach.

“

This is the area of the central bank. They are independent. They know what they should do