As economic bookmarks go, Indonesia\u2019s stock market enduring its worst\u00a0rout since the 1997-1998\u00a0Asian financial crisis is as ominous as they come.<\/p>\n
Jakarta stocks are cratering as Southeast Asia\u2019s biggest economy gets caught skinny dipping, in the Warren Buffett sense. The famed investor once observed that \u201conly when the tide goes out do you discover who\u2019s been swimming naked.\u201d<\/p>\n
And there\u2019s arguably no more urgent example of a giant, geopolitically vital economy watching sea levels drop than Indonesia.<\/p>\n
Ostensibly, the\u00a0US$80-plus billion equity loss<\/a>\u00a0over the last week is\u00a0attributable to index provider MSCI warning that Indonesia risks a downgrade to frontier status due to\u00a0weak governance.<\/p>\n Yet the currents have been shifting since October 2024, when general-turned-politician Prabowo Subianto took the presidency.<\/p>\n At the time he replaced the more reform-minded Joko Widodo, Indonesia was on something of a roll. Between 2014 and 2024, the popular Widodo restored calm to the nation\u2019s political system.<\/p>\n He also put some key reforms on the scoreboard \u2014 including transformational infrastructure projects aimed at raising productivity and competitiveness.<\/p>\n Widodo also addressed corruption and inefficiency and made government institutions more transparent. These and other upgrades improved the quality of growth, ensuring that more of Indonesia\u2019s\u00a0287 million people<\/a>\u00a0benefit from increasing output. Under\u00a0Widodo, Indonesia weathered the Covid-19 crisis better than many peers.<\/p>\n To be sure, Widodo could have done much more to address Indonesia\u2019s pre-existing conditions. Critics argue that he\u00a0was too lenient toward dynastic politics and old-fashioned patronage.<\/p>\n He also opened the door to an unpredictable successor hailing from the armed forces. Widodo was the first president from outside the military or political elite.<\/p>\n Global investors experienced whiplash early into the Prabowo era. At first, Prabowo\u2019s pledge to put Indonesia\u2019s\u00a0$1.4 trillion economy<\/a>\u00a0on a glide path to 8% annual growth prompted global funds to rediscover Indonesia. Yet outflows surged once investors realized how the president would turbocharge growth: aggressive fiscal expansion.<\/p>\n Nine months into his presidency, in September 2025, Prabowo abruptly dismissed the internationally respected Finance Minister Sri Mulyani Indrawati.<\/p>\n A former World Bank managing director, Sri Mulyani had long seen as the key guardrail against a return of fiscal-policy overreach.<\/p>\n Once her office was cleared out, Prabowo\u00a0tapped loyalist Purbaya Yudhi Sadewa, who wasted no time pumping roughly $12 billion into the economy to spur lending.<\/p>\n Next, Indonesia\u2019s new finance minister\u00a0hit the ground running on\u00a0Prabowo\u2019s controversial \u201cburden sharing\u201d plan to prod the central bank\u00a0to loosen monetary policy as the government hit the fiscal gas.<\/p>\n In a joint statement at the time, the finance ministry and\u00a0Bank Indonesia<\/a>\u00a0(BI) assured global investors that the arrangement would be conducted \u201ctransparently, accountably and with strong governance.\u201d<\/p>\n They claimed the \u201csynergy continues to refer to the principles of prudent fiscal and monetary policies, while maintaining market discipline and integrity.\u201d<\/p>\n Economists, though, worry BI was becoming a tool 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 don\u2019t seem convinced. Last week, MSCI warned of \u201cfundamental investability issues\u201d in the Indonesian stock market.<\/p>\n The statement sparked one of\u00a0the most spectacular selloffs<\/a>\u00a0since the 1990s in a damning rebuke of Prabowo\u2019s irrationality exuberant optimism.<\/p>\n Many investors worry it\u2019s too late to give Prabowo the benefit of the doubt. Rather than take policy steps to raise Indonesia\u2019s economic game and rebuild investors\u2019 trust, Prabowo\u2019s finance minister has resorted to Donald Trump-style bashing of economists.<\/p>\n Just as Trump went after the chief Goldman Sachs economist for not towing the US line, Prabowo\u2019s team has taken to blasting Citibank analysts for warning about the trajectory of Jakarta\u2019s budget deficit.<\/p>\n In a report, Citi economist Helmi Arman forecast Indonesia\u2019s budget gap is heading to 3.5% of gross domestic product, well above the legal 3% ceiling.<\/p>\n Purbaya sounded rather Trumpy in retorting that the Citi forecaster, who has two master\u2019s degrees, is \u201cnot a real economist.\u201d Yet one doesn\u2019t need a PhD to see investors aren\u2019t dismissing Citi\u2019s concerns \u2013 least of all MSCI.<\/p>\n The index giant\u2019s warning about investability issues plaguing the Jakarta market sent the rupiah sharply lower. The immediate fallout got so bad that\u00a0the stock exchange CEO, Iman Rachman,\u00a0resigned<\/a>\u00a0on January 30 to take responsibility for the \u201crecent market condition.\u201d<\/p>\n At a press conference, Rachman said that \u201cI hope this is the best decision for the capital market. May my resignation lead to improvements in our capital market.\u201d<\/p>\n Only bold and transparent capital market reforms can achieve that. MSCI raised concern about \u201congoing opacity in shareholding structures\u201d and \u201cpossible coordinated trading behaviour that undermines proper price formation.\u201d<\/p>\n MSCI, for example, wants Indonesia to tighten the definition of free float for securities. MSCI also wants\u00a0Jakarta<\/a>\u00a0to provide clearer and more credible breakdowns of positions in tradable shares.<\/p>\n \u201cSo for now, it\u2019s very much a wait-and-see in terms of what actions might follow,\u201d notes Bloomberg Intelligence strategist Sufianti, who, like many Indonesians, goes by one name.<\/p>\n In recent days, Indonesia\u2019s bond yields traded about 35 basis points above those of emerging markets peers, and barely below those of Brazil and Colombia, says economist\u00a0Jason Tuvey at Capital Economics. Indonesia\u2019s borrowing cost levels indicate that \u201cquite a lot of bad news is now priced in.\u201d<\/p>\n Strategist Jennifer Kusuma at ANZ Banking Group noted the BI\u2019s expanding role in the sovereign debt market \u201cwould foster moral hazard risks\u201d going forward.<\/p>\n The bigger problem is that by prioritizing political control over creating a more productive\u00a0economy<\/a>,\u00a0Prabowo\u00a0and his finance minister risk dragging Southeast Asia\u2019s biggest economy back to the days of living dangerously.<\/p>\n The irony, of course, is that Prabowo is a prot\u00e9g\u00e9 of dictator Suharto, who was ousted amid the 1997-1998 crisis. Without supply-side reforms, Prabowo\u2019s\u00a0 fiscal priorities will also have adverse effects\u00a0on the economy.<\/p>\n The MSCI broadside had Goldman Sachs cutting its Indonesian equities recommendation to underweight. If Indonesia really gets downgraded, Goldman Sachs analyst\u00a0Timothy Moe thinks it could see more than $13 billion in outflows. \u201cWe expect further passive selling and regard this\u00a0development<\/a>\u00a0as an overhang that will impede market performance,\u201d Moe notes.<\/p>\n Over the past several years, Indonesia had generally been a good market for global funds, Joshua Rout, portfolio manager at Franklin Templeton, told Reuters. \u201cIf these favorable features get eroded the market will likely send a stern warning as it did when UK yields came under pressure a year or so ago,\u201d Rout said.<\/p>\n \u201cAnd in Indonesia\u2019s case,\u201d Rout said, \u201cexpect it to have a much bigger impact on the exchange rate. It\u2019s always trickier in a world where capital flows are harder to come by, too.\u201d<\/p>\n Indonesia has been at the forefront of worries about central bank autonomy. The risk, notes Paramadina University economist Wijayanto Samirin, is that BI officials \u201cget too deep and detailed into fiscal matters and this disrupts our monetary policy ecosystem.\u201d<\/p>\n As all this was unfolding in September 2025, Trump was endeavoring to neuter the Federal Reserve\u2019s independence. He\u2019s\u00a0angling to fire<\/a>\u00a0or indict Fed Chair Jerome Powell, remove Governor Lisa Cook and load the policy board with loyalists like White House economist Stephen Miran.<\/p>\n As Miran argued in a 2024 paper: \u201cCentral bank independence has long been considered an essential element for successful monetary policy. But central banks are creations of political exigency, and pure independence exists only in textbooks. It can also bestow power without accountability.\u201d<\/p>\n Prabowo\u2019s efforts to compromise central bank independence and launch budget-busting populist spending policies suggest he understands little about the forces behind Indonesia\u2019s 1997-1998 crash.<\/p>\n The\u00a01Malaysia Development Berhad<\/a>\u00a0(1MDB) debacle, referred to as the greatest financial heist in history, didn\u2019t stop\u00a0Prabowo\u00a0from setting up a sovereign wealth fund called\u00a0Danantara<\/a>. Many have voiced concern over its governance structure<\/a> and conflicts of interest. The president is also championing\u00a0runaway security and defense spending<\/a>.<\/p>\n