War, weak rupiah and wary investors put pressure on Indonesia’s economy

JAKARTA, June 15 — Indonesia’s economy faces a perfect storm wrought by high energy prices and, while the currency has rebounded slightly, critics warn government policies are unnerving investors at a critical moment.

South-east Asia’s biggest economy, a net oil importer, was hit hard by the global surge in crude prices fuelled by the Middle East war.

To shield its citizens, the government has insisted on maintaining a costly fuel subsidy and a multi-billion-dollar school meal programme criticised as wasteful and blamed for mass food poisoning.

At a time when Indonesia desperately needs foreign currency, authorities spooked investors with tighter export controls lambasted as “resource nationalism”, while a move by parliament to tighten oversight of the central bank raised fears over its independence.

The rupiah has plummeted, hitting successive record lows and dropping below 18,100 against the US dollar this week.

The stock market has lost about a third of its value since the start of the year – one of the worst performances globally – as traders increasingly “sell Indonesia”.

This week, there was some reprieve as the currency and markets reacted positively to the central bank raising its base lending rate by 75 basis points in back-to-back hikes.

However, “investor concerns over recent domestic policy moves will persist”, according to an analysis by BMI, a unit of Fitch Solutions.

It noted that the rupiah remained about seven per cent weaker than at the start of the war in February.

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

This, in turn, would force Bank Indonesia “to hike rates further”, it added.

‘Populist and interventionist’

High lending rates tend to dampen economic growth.

President Prabowo Subianto’s government is pursuing a growth target of eight per cent by 2029 as one of its major policy objectives – an ambitious goal some experts warn will be difficult to achieve.

Deputy Finance Minister Juda Agung told AFP this week the government would not abandon its target despite the high social spending that underpins it.

“We have to grow higher to become a rich country by 2045,” he said in an interview.

“Otherwise we are... going to be trapped in the middle-income countries group.”

Juda, a former central bank deputy governor, said the government supported the recent interest rate hikes despite the potential risk to growth as well as higher debt-servicing costs for the state.

“This is the area of the central bank. They are independent. They know what they should do,” he said.

Interest rate hikes alone may not be enough to prop up the rupiah, experts say.

“Placing the currency on a firmer footing requires... the Prabowo administration to shift away from its populist and interventionist policy agenda,” Capital Economics said in a note this week.

“Ultimately what’s needed is a clear shift... towards more investor-friendly policymaking.”

Rebuilding trust

Juda insisted the rupiah was undervalued and that economic pressures were “manageable” and would abate once the war ends.

“Our economy is quite resilient,” he said.

Economists expect further interest rate hikes, potentially creating additional pressure on the government’s budget deficit, which by law must be kept below three per cent of gross domestic product (GDP).

Adding to the uncertainty, Jakarta is awaiting a decision by MSCI on its market-risk status after the group expressed concerns about the transparency of stock ownership.

A downgrade could trigger further capital flight.

According to Juda, there have been “big inflows on the government bond” since the interest rate increase, as well as “signs of confidence in the stock market”.

The World Bank said on Thursday that Indonesia would likely record growth of no more than 5.0 per cent under the strain of high public spending — below the government’s target of 5.4 per cent.

Official data showed the economy grew 5.6 per cent in the first quarter of 2026, although analysts have expressed doubts about the reliability of the figures.

Deni Friawan, a researcher at the Centre for Strategic and International Studies in Jakarta, said the government should cut spending to demonstrate its commitment to keeping the fiscal deficit under control.

“Trust is earned by performance, by reputation, by action, not just with words,” he told AFP. — AFP