Indonesia’s stock market turmoil has ignited growing concerns over the nation’s investment climate, shifting the outlook for Southeast Asia’s largest economy from optimism to uncertainty. Just over a year ago, investors had high expectations for the country under President Prabowo Subianto, anticipating a continuation of former President Joko Widodo’s pro-business policies. However, these expectations have faltered amid mounting financial challenges and a series of unsettling market movements.
The catalyst for this new wave of investor unease was a sharp decline in the Jakarta Composite Index (JCI) on Tuesday, which led to a trading halt—the first since the pandemic. The index, down 21% from its peak last September, remains one of the worst-performing global equities markets this year. Market instability has been further exacerbated by concerns over Prabowo’s ambitious welfare spending plans, which have strained public finances and raised questions about the government’s fiscal health.
“The shift in priorities under President Prabowo has caught investors off guard,” said Thea Jamison, Managing Director at Change Global Investment LLC. “What was initially anticipated as a continuation of pro-business policies has instead become a focus on unquantified welfare programs that have yet to be fully articulated.”
Following Tuesday’s sharp selloff, the JCI showed some resilience in early trading Wednesday, initially dipping more than 1% before recovering to trade 0.3% higher. However, the volatility has left investors questioning the long-term stability of Indonesia’s financial markets.
A key factor fueling investor fears is the speculation surrounding Finance Minister Sri Mulyani Indrawati’s potential resignation. Although Indrawati dismissed the rumors, the uncertainty added to broader concerns about the country’s fiscal management. Indonesia is grappling with an early-year budget deficit, a 20% drop in state revenues, and an unclear plan for future revenue generation.
In addition to fiscal concerns, the recent establishment of Indonesia’s sovereign wealth fund, Danantara, has raised alarms about political interference in the economy. The fund, which reports directly to the President, holds significant stakes in companies comprising over 20% of the JCI Index, amplifying fears of a lack of transparency and undue political influence on business operations.
“Foreign investors are increasingly jittery about Prabowo’s approach to fiscal reallocation and his signals about government spending,” noted Homin Lee, Senior Macro Strategist at Lombard Odier Ltd. “The question now is whether the government can maintain fiscal discipline amidst these growing challenges.”
The outflow of foreign capital from Indonesia has already been significant, with $1.6 billion in net withdrawals from the stock market this year. This retreat, compounded by a stronger U.S. dollar and rising global trade tensions, has caused the rupiah to depreciate by 2%, making it the worst-performing currency in Asia this year.
Indonesia’s bond market has also been under pressure, with spreads on dollar-denominated bonds reaching their widest levels in six months. Additionally, PT Bank Tabungan Negara postponed a planned dollar bond offering, citing market volatility.
The uncertainty surrounding Indonesia’s fiscal outlook has prompted global investors to withdraw from the government bond market, with over $1 billion in net sales recorded on Monday—the largest outflow in nearly six years, according to finance ministry data.
The turmoil has led financial institutions such as Goldman Sachs to downgrade Indonesia’s equities from “overweight” to “market weight,” citing concerns about weaker earnings, policy unpredictability, and the potential impact on state-owned banks’ profitability.
“The market is uncertain as the government adjusts to new leadership, and investors are seeking clearer direction,” explained Chetan Sehgal, a portfolio manager at Franklin Templeton Investments. “There is a palpable apprehension in response to the recent changes, and it is now up to the government to rebuild credibility.”
As the nation navigates this uncertain economic terrain, investors are looking ahead to the central bank’s upcoming monetary policy meeting, hoping for measures that may stabilize the financial markets and support growth amid ongoing volatility.
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