Indonesia is currently grappling with a mass withdrawal of foreign capital as global investors express deep concern over the fiscal direction of President Prabowo Subianto. Since his 2024 election campaign, the President has promised to drive economic growth to 8% through massive investments in housing, health, and education. However, these populist spending pledges are clashing with a challenging economic landscape, leading experts to warn of potential instability.
The economic strain began when the closure of the Strait of Hormuz disrupted global fuel supplies. As a nation heavily reliant on imported energy, Indonesia faced an immediate crisis. The government’s fuel subsidy budget, originally set at approximately $22 billion (€19.2 billion), required an additional $6 billion to maintain price stability. This fiscal pressure, combined with Prabowo’s expansive spending promises, has spooked markets.
The impact on Indonesian assets has been severe. The rupiah dropped 8% to hit record lows near 18,000 to the dollar, while the Jakarta stock market, which had been heading for a record above 9,000, plummeted by a third, making it the worst-performing market of the year. Financial Times data indicates that global funds have sold a net $3.9 billion in Indonesian stocks, marking the largest sell-off since just before the 1997-98 Asian Financial Crisis.
Investors are particularly wary of the new sovereign wealth fund, which manages assets worth roughly $900 billion. While the extra funding drew strong political and public support, investors and other experts were alarmed.
Netherlands-based economist Rizal Shidiq at the University of Leiden described Prabowo's policies as "overly ambitious" and "inefficient." Shidiq told DW that the market views the President's flagship programs as a significant strain on an already tight fiscal space, adding that the Hormuz closure made the spending plans look "increasingly unsustainable." While Indonesia had for years thrived on steady growth backed by prudent budgeting and a deficit ceiling of 3% of gross domestic product (GDP), the current government has been criticized for relying on bigger deficits and pushing the country toward growth sustained by debt.
According to CEIC Data, Indonesia's debt-to-GDP ratio is 40.75%, lower than many emerging-market peers, but the cost of servicing that debt is the real problem. Local media reported recently that close to a quarter of all tax receipts in 2026 would go toward interest payments—more than double the ratio recommended by the International Monetary Fund.
Furthermore, Indonesia lags behind Southeast Asian peers like Thailand, Vietnam, and the Philippines in tax revenues collected. Jakarta also faces heavy refinancing pressure, with about 834 trillion rupiah ($46.1 billion, €40.3 billion) of government debt maturing this year, according to financial news outlet Kontan.
The skepticism has reached international ratings agencies. Earlier this year, Moody’s and Fitch cut Indonesia’s outlook to negative, citing the risks from Prabowo's rapid spending push. Additionally, US-based finance company MSCI, which owns the benchmark index used by investors to track domestic stocks, warned in January that Indonesia risked being downgraded from an emerging market to a frontier economy.
In a further embarrassment, S&P Global Ratings warned on July 9, 2026, that it too may announce a similar downgrade, citing transparency issues. Such a change of status would be a severe blow to one of the fastest-growing economies in the G20, as many institutional investors avoid frontier markets.
While falling oil prices will now help stabilize public finances, Prabowo still faces intense pressure to rein in his ambitions, which Siwage Dharma Negara, senior fellow at the Singapore-based Institute of Southeast Asian Studies (ISEAS) – Yusof Ishak Institute, doubts he will fully heed. "I think populist spending will continue to expand faster than state revenue collection," Negara told DW.
"With this current trend, markets will look at Indonesia as a high-risk destination." The Asian financial crisis gave Indonesia a lasting lesson on fiscal prudence, and investors are concerned that some of the hard-won prudence is now being eroded.
While Jakarta is not at risk of repeating the excesses of the crisis years, it will likely struggle to achieve its 5% growth target this year, let alone the much-coveted 8%. Negara warned that investor confidence can deteriorate quickly if governance concerns, fiscal risks, and currency pressure reinforce each other like in 1998. Australian National University's Arianto Patunru went further, telling DW that if Prabowo doesn't rein in his exuberance, Indonesia's economic fortunes risk moving from a "slow-motion loss to a free fall."
The cost of fuel subsidies, for which ministers had budgeted around $22 billion (€19.2 billion), rocketed. Reuters news agency reported in March that policymakers would need an extra $6 billion or more to keep prices stable.
The rupiah lost more than 80% of its value and the Indonesian economy contracted by 13%, sparking deadly riots that forced then-US-backed dictator Suharto from office.
