Indonesian Businesses Enter Survival Mode Amid Economic Pressures
The mood among most Indonesian economic and business players is likely one of apprehension and anxiety. This is not without cause, as most domestic entrepreneurs confirm they have entered survival mode. The reasons are straightforward: ongoing geopolitical uncertainties and a sustained, significant weakening of the rupiah.
This survival mode is reflected in private sector foreign debt (ULN) data. Bank Indonesia (BI) recorded private sector ULN at $191.4 billion in March 2026, a 1.8% year-on-year contraction. Looking further back, this figure is the lowest in eight years.
The last time private sector ULN was lower was in December 2018 at $191.0 billion. Domestic business actors assert that the ongoing decline in ULN is a clear indicator of heightened caution among companies, with a longer-term approach to expansion.
First, ongoing global geopolitical tensions continue to disrupt international logistics, leading to surging energy prices and higher raw material costs.
Second, the rupiah hit a record low of 17,666 per US dollar on 18 May 2026. The currency’s depreciation automatically increases production and operational costs, risking cash flow disruptions, especially for industries reliant on imported raw materials.
Third, consumer purchasing power has yet to fully recover. Weak domestic consumption due to local economic pressures and global sentiment has left manufacturers with little incentive to ramp up production capacity.
Fourth, business operators have shifted their primary focus from growth strategies to crisis mitigation.
In this pressured business climate, competitive financing offers from domestic and foreign sources have become irrelevant for domestic corporations. This is why the private sector is maintaining low ULN levels.
MANUFACTURING SECTOR ENTERS CONTRACTION ZONE
The wait-and-see stance of local entrepreneurs is confirmed by the domestic manufacturing sector entering contraction in April 2026, amid sharply rising cost inflation due to global supply disruptions from geopolitical conflicts (Gulf War between Israel, the US, and Iran).
Recent S&P Global data shows Indonesia’s manufacturing Purchasing Managers’ Index (PMI) fell from 50.1 in March 2026 to 49.1 in April, below the neutral 50 threshold. This marks the first contraction in nine months and reflects weakening industrial operations in Q2 2026. The primary driver was a sharp drop in production volume, the fastest decline since May 2025.
Manufacturing executives report rising raw material prices, supply shortages, and weakened consumer purchasing power, particularly among the middle class, as key drivers of production slowdown. Meanwhile, Middle East conflicts exacerbate pressures through global supply chain disruptions and higher logistics costs.
Indonesia’s manufacturing sector is feeling intensifying inflationary pressures amid Middle East conflicts. Companies recorded a solid output contraction in April, with anecdotal evidence pointing to higher raw material costs and production supply shortages.
Input cost pressures in April were the highest in four years, prompting producers to raise selling prices at the fastest rate in over 12 years.
Meanwhile, raw material purchasing activity declined due to reduced production needs. Companies are using existing stockpiles amid difficulties sourcing new materials, while finished goods inventories rose due to unsold stockpiles.
Amid these pressures, there is a slight positive signal in demand. New orders rose marginally, mainly from domestic markets. However, this increase was driven by early purchasing to anticipate price hikes and supply disruptions, not sustained demand growth.
Export orders, meanwhile, declined, reflecting weak global demand. This is confirmed by Indonesia’s March 2026 trade surplus of $3.32 billion.
This maintains a 71-month consecutive trade surplus since May 2020, driven by positive non-oil and gas commodity performance. However, monthly surpluses are expected to ease in the near term as global demand weakens due to the Gulf conflict.
Consequently, business confidence is also under pressure. Optimism about production prospects over the next 12 months fell to the lowest level in five months, amid uncertainty over the duration of global conflicts and their economic impact.
Nevertheless, industry players remain hopeful for a future recovery, particularly if geopolitical tensions ease through peace agreements or ceasefires between warring nations, which are currently straining the manufacturing sector.
FORMAL EMPLOYMENT SHARE SHRINKS
Further confirmation of national economic pressures comes from recent data from the Central Statistics Agency (BPS) which reported