Market Rout Continues in Indonesia - Rupiah and Stocks Under Pressure

By 4:00 pm local Indonesian time on Thursday, the rupiah traded at IDR 18,020 per US dollar, or a 0.45 percent loss in value since the opening of trade. Meanwhile, the Jakarta Composite Index closed at the level of 5,839.79 points, down 1.70 percent from where it started in the morning. Over the past six months, the Jakarta Composite Index lost over 32 percent of its value.

Why Do Markets Seem to Have Lost Confidence in Indonesian Assets?

There are a number of factors that -together- put severe pressure on Indonesian assets. This involves international and domestic factors.

In terms of international factors, there remains great uncertainty surrounding the wars in the Middle East and Eastern Europe. Particularly the Iran War has been pushing global oil prices above USD $95 per barrel for most of March, April and May 2026. Currently, in the first week of June 2026, there is no certainty that crude prices will decline markedly in the short-term as US President Donald Trump is unlikely to end his aggressive foreign policy (which is the very cause of high oil prices). Considering Indonesia is a net oil importer, high oil prices in combination with the weak rupiah put a lot of pressure on Indonesia's trade balance, current account balance, foreign exchange reserves, and budget deficit.

Secondly, the US Federal Reserve is likely to keep its benchmark interest rates higher for longer (in an effort to curb US inflation). In fact, it is increasingly likely the Fed will raise rates rather than cutting them. This means that (risk-free) US assets are attractive for investors. Bank Indonesia is trying to defend the rupiah (having raised its benchmark BI Rate by 50 basis points to 5.25 percent in mid-May 2026). However, investors remain unconvinced by this hike, viewing the central bank as behind the curve given the severity of the rupiah's slide. One might remember that back in mid-2024, the BI Rate was already at 6.25 percent to defend a much stronger rupiah (around IDR 16,000 per US dollar).

In terms of domestic factors, Indonesian stocks have been under pressure after a number of global indices removed Indonesian stocks. For example, MSCI and FTSE Russell removed Indonesian stocks, primarily due to free-float requirements, concentrated share ownership, and listing board relocations. This came after both Fitch Ratings and Morgan Stanley adjusted their outlooks for Indonesia, reflecting heightened caution over the country's changing macroeconomic, fiscal, and market dynamics.

Secondly, Indonesian President Prabowo Subianto announced in the third week of May 2026 that state sovereign wealth fund Danantara will monopolize all the country's coal and palm oil exports. This is an act of state intervention that carries risks related to efficiency and transparency.

Meanwhile, there is concern over the fiscal deficit of Indonesia. Even though the budget deficit eased to 0.64 percent of gross domestic product (GDP) at the end of April 2026 (down from 0.93 percent of GDP in Q1-2026), every step the rupiah depreciates or oil climbs adds trillions of rupiah to the government's energy subsidy burden (fuel and electricity subsidy spending). The concern is that the legally mandatory 3 percent of GDP budget deficit ceiling will be overshot. In that context, it was a logical step for Prabowo to remove highly respected technocrat Sri Mulyani Indrawati from her position of Finance Minister and replace her with Purbaya Yudhi Sadewa (who is believed to make more fiscal space for Prabowo's programs). However, markets have far more confidence in Indonesia when Sri Mulyani is watching the country's fiscal situation.

Related to the fiscal risk, is excessive government spending on populist programs such as the Free Nutritious Meals program (MBG). The Indonesian government allocated IDR 268 trillion (approx. USD$14.7 billion) for the MBG program in the 2026 State Budget (APBN). While this does support households' purchasing power (which helped push Q1-2026 GDP growth rate to a comfortable 5.61 percent year-on-year), the concern is that the government sacrifices structural growth, such as infrastructure development.

The fact that domestic consumption remains strong while the country's stock, bond, and currency markets crash highlights a dangerous disconnect. As foreign equity capital flees, this economic divergence should be taken as a major warning.

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