Risk Premium and Extreme Depreciation of the Rupiah
Senior economist Oliver Blanchard from the Massachusetts Institute of Technology (MIT) has stated that domestic and foreign investment flows are influenced not only by income levels but also by interest rates combined with the risk premium. While rising income boosts investment, high interest rates coupled with a high risk premium can lead to a decline in investment, ultimately impacting national output.
Since January 2026, Indonesia has experienced an increase in perceived risk, reflected in a high country risk premium of approximately 2.46 per cent. This is notably higher than Malaysia’s 1.55 per cent and Thailand’s 2.07 per cent. Similarly, Indonesia’s equity risk premium reached 6.69 per cent since January 2026, significantly higher than Malaysia’s 5.78 per cent and Thailand’s 6.30 per cent.
This high risk perception has caused the Rupiah to weaken, hitting an all-time low of approximately Rp 17,500 per US Dollar on Tuesday, 12 May 2026. This extreme depreciation has been ongoing since January 2026. In contrast, other Southeast Asian currencies, such as the Malaysian Ringgit and Thai Baht, have shown more stability or strengthening trends due to lower risk perceptions.
Furthermore, the high equity risk premium in Indonesia has caused the Jakarta Composite Index (IHSG) to drop drastically from an all-time high of 9,147.5 on 19 January 2026 to just 6,853.5 on 12 May 2026. This stands in stark contrast to the Malaysian stock index (FKLCI), which rose by 0.30 per cent in the latest session and 10.36 per cent year-on-year, and the Thai SET 50, which remained relatively stable.
The high risk premium of the Rupiah is also evident in the anomaly of its depreciation despite positive fundamental indicators. According to the Central Bureau of Statistics (BPS), Indonesia’s economic growth reached 5.61 per cent, the highest since 2023. This suggests that the extreme depreciation of the Rupiah is decoupled from macroeconomic fundamentals such as interest rate differentials, economic growth, and inflation between Indonesia and the US.
The phenomenon of extreme depreciation and the sharp decline in the IHSG since January 2026 reflects the high risk premium of the national economy. Risk premium is defined as the additional compensation investors demand for taking on the risk of holding a country’s financial assets compared to lower-risk assets. A high risk premium determines a country’s investment attractiveness; high premiums increase the gap between domestic interest rates (plus risk premium) and international rates.
Currently, the high national risk premium stems partly from the fiscal side, specifically a high fiscal deficit ratio of approximately 2.92 per cent of GDP in 2025, which continued at 0.95 per cent in the first quarter of 2026. Additionally, Indonesia’s Debt Service Ratio (DSR)—the ratio of debt and interest payments to net government revenue—has reached approximately 47.67 per cent, meaning nearly half of national revenue is used to service debt.
The primary balance also remains negative, indicating that state revenue is insufficient to cover expenditures and interest payments, necessitating new debt to service old obligations. Furthermore, country-specific risks, such as uncertainty regarding the national economic outlook, increase the Rupiah’s risk premium, prompting investors to demand higher compensation.
To address this, referring to the work of John A. Carlson Krannet (Purdue University) and C. L. Osler (Federal Reserve, New York), it is essential to implement macro-prudential and micro-prudential policy interventions to eliminate country-specific risks. The government and banks can mitigate these risks through more technocratic and rational policy communication rather than populist rhetoric, adhering to the economic principle of prudence. Ultimately, the government must convince market participants of prudent monetary and fiscal policies and provide a positive outlook for the national economy.