Why Investors Are Suddenly Fleeing Indonesia

Since the pandemic, Indonesia has recorded stable annual economic growth of around 5%. Then, Iran closed the Strait of Hormuz. As the largest economy in Southeast Asia, which remains heavily dependent on fuel imports despite having its own oil reserves, the impact on state coffers was immediate. The cost of energy subsidies, previously budgeted at around Rp396 trillion, soared. Reuters reported in March that policymakers needed at least an additional Rp108 trillion to keep fuel prices stable. The rupiah exchange rate plummeted by 8%, hitting a record low near Rp18,000 per US dollar. Meanwhile, the Jakarta stock market, previously expected to break records above the 9,000 level, plunged by a third, making it the worst-performing bourse this year. Foreign investors pulled billions of dollars from Indonesian assets. The Financial Times calculated that global investment funds have recorded net sales of Indonesian shares worth around Rp70.2 trillion so far this year, the largest sell-off since the run-up to the 1997-1998 Asian Financial Crisis. Markets were rocked by the surge in energy costs coinciding with President Prabowo Subianto’s various big-spending promises. During the 2024 election campaign, Prabowo pledged to boost economic growth to 8% through trillions of rupiah in state spending on housing, education, and health. Since his election, he has also launched a new sovereign wealth fund managing assets worth around US$900 billion, equivalent to Rp16.2 quadrillion. While this additional spending enjoys strong political and public support, investors and some economists have voiced concerns. Leiden University economist Rizal Shidiq described Prabowo’s policies as ‘too ambitious’ and ‘inefficient,’ adding that the Strait of Hormuz closure makes the government’s spending plans appear ‘increasingly unsustainable’. For years, Indonesia enjoyed stable growth thanks to budget discipline and a deficit cap of 3% of gross domestic product. However, the Prabowo administration is now criticised for relying on larger deficits and pursuing debt-fuelled economic growth. According to CEIC data, Indonesia’s debt-to-GDP ratio is 40.75%, relatively low compared to many developing nations. The main issue, however, is the cost of servicing that debt. Local media recently reported that nearly a quarter of tax revenue in 2026 will be used to pay interest on debt, more than double the ratio recommended by the International Monetary Fund. Indonesia also lags behind Southeast Asian peers like Thailand, Vietnam, and the Philippines in tax revenue collection. Jakarta faces significant refinancing pressure, with government debt worth around Rp834 trillion (US$46.1 billion) maturing this year, according to economic media outlet Kontan. ‘The government really wants to accelerate growth,’ wrote Arianto Patunru, a researcher at the Australian National University’s Indonesia Project, in a recent blog post. ‘But ambition is no substitute for credibility.’ Concerns about credibility are already reflected in rating agency assessments. Earlier this year, Moody’s and Fitch downgraded Indonesia’s outlook to negative, judging that Prabowo’s accelerated spending carries fiscal risks. In January, MSCI, the US-based financial services company that manages benchmark indices for global investors, warned that Indonesia risks being downgraded from emerging market to frontier market status. MSCI cited a lack of transparency in ownership at several companies listed on the Indonesia Stock Exchange, as well as allegations of coordinated trading patterns, which make it difficult for investors to know the true number of shares in circulation and undermine confidence in market pricing. In a further blow, S&P Global Ratings warned last week (9 July 2026) that it may also announce a similar downgrade due to transparency issues. Such a reclassification would be a severe setback for one of the G20’s fastest-growing economies, as many institutional investors avoid frontier markets. ‘The downgrade would have a very serious impact because Indonesia would fall off the radar of investors focused on emerging markets, precisely when the country desperately needs additional capital to drive economic growth,’ Shidiq said. Although a drop in oil prices is expected to help stabilise state finances, Prabowo remains under significant pressure to rein in his spending ambitions. However, Siwage Dharma Negara, a senior researcher at the Singapore-based ISEAS – Yusof Ishak Institute, doubts this will happen. ‘I think populist spending will continue to grow faster than state revenue growth,’ Negara told DW. ‘If this trend continues, the market will view Indonesia as a high-risk investment destination.’ The 1998 Asian Financial Crisis taught Indonesia a hard lesson about the importance of fiscal prudence. High debt, cronyism, and weak banking supervision led the country to the brink of collapse.