As economic bookmarks go, Indonesia’s stock market enduring its worst rout since the 1997-1998 Asian financial crisis is as ominous as they come.
Jakarta stocks are cratering as Southeast Asia’s biggest economy gets caught skinny dipping, in the Warren Buffett sense. The famed investor once observed that “only when the tide goes out do you discover who’s been swimming naked.”
And there’s arguably no more urgent example of a giant, geopolitically vital economy watching sea levels drop than Indonesia.
Ostensibly, the US$80-plus billion equity loss over the last week is attributable to index provider MSCI warning that Indonesia risks a downgrade to frontier status due to weak governance.
Yet the currents have been shifting since October 2024, when general-turned-politician Prabowo Subianto took the presidency.
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’s political system.
He also put some key reforms on the scoreboard — including transformational infrastructure projects aimed at raising productivity and competitiveness.
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’s 287 million people benefit from increasing output. Under Widodo, Indonesia weathered the Covid-19 crisis better than many peers.
To be sure, Widodo could have done much more to address Indonesia’s pre-existing conditions. Critics argue that he was too lenient toward dynastic politics and old-fashioned patronage.
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.
Global investors experienced whiplash early into the Prabowo era. At first, Prabowo’s pledge to put Indonesia’s $1.4 trillion economy on 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.
Nine months into his presidency, in September 2025, Prabowo abruptly dismissed the internationally respected Finance Minister Sri Mulyani Indrawati.
A former World Bank managing director, Sri Mulyani had long seen as the key guardrail against a return of fiscal-policy overreach.
Once her office was cleared out, Prabowo tapped loyalist Purbaya Yudhi Sadewa, who wasted no time pumping roughly $12 billion into the economy to spur lending.
Next, Indonesia’s new finance minister hit the ground running on Prabowo’s controversial “burden sharing” plan to prod the central bank to loosen monetary policy as the government hit the fiscal gas.
In a joint statement at the time, the finance ministry and Bank Indonesia (BI) assured global investors that the arrangement would be conducted “transparently, accountably and with strong governance.”
They claimed the “synergy continues to refer to the principles of prudent fiscal and monetary policies, while maintaining market discipline and integrity.”
Economists, though, worry BI was becoming a tool of the president’s growth strategy. ANZ Banking Group strategist Jennifer Kusuma notes that BI’s growing role in the sovereign debt market “would foster moral hazard risks” going forward.
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.
“We will maintain the independence of the central bank and the government as much as possible,” Purbaya said. “I will not squeeze the central bank to finance our development programs.”
The folks at MSCI don’t seem convinced. Last week, MSCI warned of “fundamental investability issues” in the Indonesian stock market.
The statement sparked one of the most spectacular selloffs since the 1990s in a damning rebuke of Prabowo’s irrationality exuberant optimism.
Many investors worry it’s too late to give Prabowo the benefit of the doubt. Rather than take policy steps to raise Indonesia’s economic game and rebuild investors’ trust, Prabowo’s finance minister has resorted to Donald Trump-style bashing of economists.
Just as Trump went after the chief Goldman Sachs economist for not towing the US line, Prabowo’s team has taken to blasting Citibank analysts for warning about the trajectory of Jakarta’s budget deficit.
In a report, Citi economist Helmi Arman forecast Indonesia’s budget gap is heading to 3.5% of gross domestic product, well above the legal 3% ceiling.
Purbaya sounded rather Trumpy in retorting that the Citi forecaster, who has two master’s degrees, is “not a real economist.” Yet one doesn’t need a PhD to see investors aren’t dismissing Citi’s concerns – least of all MSCI.
The index giant’s warning about investability issues plaguing the Jakarta market sent the rupiah sharply lower. The immediate fallout got so bad that the stock exchange CEO, Iman Rachman, resigned on January 30 to take responsibility for the “recent market condition.”
At a press conference, Rachman said that “I hope this is the best decision for the capital market. May my resignation lead to improvements in our capital market.”
Only bold and transparent capital market reforms can achieve that. MSCI raised concern about “ongoing opacity in shareholding structures” and “possible coordinated trading behaviour that undermines proper price formation.”
MSCI, for example, wants Indonesia to tighten the definition of free float for securities. MSCI also wants Jakarta to provide clearer and more credible breakdowns of positions in tradable shares.
“So for now, it’s very much a wait-and-see in terms of what actions might follow,” notes Bloomberg Intelligence strategist Sufianti, who, like many Indonesians, goes by one name.
In recent days, Indonesia’s bond yields traded about 35 basis points above those of emerging markets peers, and barely below those of Brazil and Colombia, says economist Jason Tuvey at Capital Economics. Indonesia’s borrowing cost levels indicate that “quite a lot of bad news is now priced in.”
Strategist Jennifer Kusuma at ANZ Banking Group noted the BI’s expanding role in the sovereign debt market “would foster moral hazard risks” going forward.
The bigger problem is that by prioritizing political control over creating a more productive economy, Prabowo and his finance minister risk dragging Southeast Asia’s biggest economy back to the days of living dangerously.
The irony, of course, is that Prabowo is a protégé of dictator Suharto, who was ousted amid the 1997-1998 crisis. Without supply-side reforms, Prabowo’s fiscal priorities will also have adverse effects on the economy.
The MSCI broadside had Goldman Sachs cutting its Indonesian equities recommendation to underweight. If Indonesia really gets downgraded, Goldman Sachs analyst Timothy Moe thinks it could see more than $13 billion in outflows. “We expect further passive selling and regard this development as an overhang that will impede market performance,” Moe notes.
Over the past several years, Indonesia had generally been a good market for global funds, Joshua Rout, portfolio manager at Franklin Templeton, told Reuters. “If 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,” Rout said.
“And in Indonesia’s case,” Rout said, “expect it to have a much bigger impact on the exchange rate. It’s always trickier in a world where capital flows are harder to come by, too.”
Indonesia has been at the forefront of worries about central bank autonomy. The risk, notes Paramadina University economist Wijayanto Samirin, is that BI officials “get too deep and detailed into fiscal matters and this disrupts our monetary policy ecosystem.”
As all this was unfolding in September 2025, Trump was endeavoring to neuter the Federal Reserve’s independence. He’s angling to fire or indict Fed Chair Jerome Powell, remove Governor Lisa Cook and load the policy board with loyalists like White House economist Stephen Miran.
As Miran argued in a 2024 paper: “Central 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.”
Prabowo’s efforts to compromise central bank independence and launch budget-busting populist spending policies suggest he understands little about the forces behind Indonesia’s 1997-1998 crash.
The 1Malaysia Development Berhad (1MDB) debacle, referred to as the greatest financial heist in history, didn’t stop Prabowo from setting up a sovereign wealth fund called Danantara. Many have voiced concern over its governance structure and conflicts of interest. The president is also championing runaway security and defense spending.
Markets aren’t always right. But the chaotic losses in stocks, down more than 6% so far in 2026, and volatility in the rupiah have investors sensing a 1997-like whiff in Jakarta’s air.
This places the onus on Prabowo to demonstrate that he has a credible plan to take Indonesia forward without breaking the bank and sparking a new generation financial crisis.
Follow William Pesek on X at @WilliamPesek
