Crashing currency and economic pressure threaten to derail Indonesia

Indonesia’s economy is under intense pressure right now as violent protests, a falling currency, and political tension hammer confidence in what Wall Street considers Southeast Asia’s most stable market.

On Monday, the Jakarta Composite Index dropped as much as 3.6%, while the rupiah sank to 16,500 per U.S. dollar, its weakest point since August 1, according to data from LSEG.

The protests were triggered by frustration over soaring living costs, legislators’ fat paychecks, and recent reports of police violence, creating one of the worst crises the country has faced since President Prabowo Subianto took office last year.

So far, at least eight people are dead, and the streets of Jakarta and other major cities are packed with protesters demanding action. Prabowo told the press on Sunday that the parliament would take public anger seriously, and said lawmakers would be forced to cut back on their huge allowances.

He also warned that “firm action will be taken” against demonstrators causing damage, saying that some groups are “leading to treason and terrorism.” Prabowo has ordered the military and police to respond aggressively to looting and violence.

Central bank prepares to intervene

Airlangga Hartarto, the country’s chief economic minister, told reporters at a joint event with the Indonesia Stock Exchange and the financial services regulator that the economy “is fundamentally solid” and would receive a lift from a new incentive package being worked on.

“We hope for a peaceful and respectful situation that will support economic recovery,” Airlangga said, attempting to calm market nerves. But investors weren’t convinced. The rupiah and the stock market both took sharp hits following news of the Friday protests.

Early Monday, Erwin Gunawan Hutapea, who leads monetary management at Bank Indonesia, said the central bank will step in if needed, using market intervention to keep the rupiah in line with its real value.

Erwin said this was to ensure the currency’s movements reflect “fundamentals,” suggesting they’re closely watching foreign exchange flows.

Bond markets also reacted. Yields on Indonesia’s 10-year government debt rose to 6.335%, while 30-year bond yields held near 6.850%. Investors demanded higher returns to hold Indonesian paper amid the political chaos.

Investors watch for long-term response

Despite the market chaos, Radhika Rao, an economist at DBS, said the country’s long-term growth story remains intact. She said investors will focus on whether the government can shift budget cuts toward job creation.

Radhika also said Bank Indonesia still has room to keep interest rates low and is expected to act quickly to stabilize the situation and support the rupiah.

Meanwhile, BlackRock, the world’s biggest asset manager, hasn’t pulled out. Navin Saigal, the firm’s head of fundamental fixed income for Asia Pacific, said BlackRock has increased its holdings of long-dated Indonesian government bonds, preferring notes that mature in 10 to 15 years.

Navin explained the firm switched out of shorter-term bonds because the longer ones didn’t react as sharply to Bank Indonesia’s recent surprise rate cut and the Federal Reserve’s dovish tone last month.

“The recent headlines, in and of themselves, have not caused us to change any positions in Indonesia,” he said. “While I certainly think the situation warrants monitoring, it reinforces the notions that having sufficient risk premium, or margin of safety, in an investment is of utmost importance, and that a diversified approach is critical.”

Indonesia, with a population of 284 million, is still the fourth-largest economy by population globally. But these protests are shaking that image. The country had long been seen as a dependable emerging market.

Now, with blood on the streets and political promises flying around, the focus is shifting to how fast the government can regain control and whether foreign capital will stick around long enough to believe in the recovery.

All eyes are on how Prabowo and his team respond next. The protests aren’t going away, and neither is the pressure on the currency. With investors growing cautious and the public demanding answers, Indonesia is running out of room to stall.

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