Why Investors Are Suddenly Fleeing Indonesia

Since the pandemic, Indonesia has recorded steady annual economic growth of around 5%. Then Iran closed the Strait of Hormuz.

As the largest economy in South-East Asia, still heavily dependent on fuel imports despite having its own oil reserves, the impact was immediately felt in the state coffers.

Energy subsidy costs, previously budgeted at around Rp396 trillion, soared sharply. Reuters reported in March that policymakers needed at least an additional Rp108 trillion to keep fuel prices stable.

The rupiah exchange rate fell 8% to touch a record low of nearly Rp18,000 per US dollar. Meanwhile, the Jakarta stock market, which had previously been expected to break records above the 9,000 level, instead crashed by a third, making it the worst-performing exchange this year.

Foreign investors have pulled billions of dollars out of 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 have been shaken by the surge in energy costs coinciding with President Prabowo Subianto’s various big-spending promises.

Populist policy versus market pressure

During the 2024 election campaign, Prabowo promised to push economic growth to 8% through state spending worth trillions of rupiah on housing, education and health.

Since taking office, he has also launched a new sovereign wealth fund managing assets worth around US$900 billion, equivalent to Rp16.2 quadrillion.

Although the additional spending has strong political and public support, investors and a number of economists have expressed concern. Rizal Shidiq, an economist at Leiden University in the Netherlands, described Prabowo’s policies as “overly ambitious” and “inefficient”.

“The market views the President’s flagship programmes as a major burden on already-narrow fiscal space,” Shidiq told DW. He added that the closure of the Strait of Hormuz has made the government’s spending plans look “increasingly unsustainable”.

For years, Indonesia enjoyed stable growth thanks to budget discipline and a deficit ceiling of 3% of gross domestic product (GDP). However, the Prabowo administration has been criticised for starting to rely on larger deficits and pushing debt-fuelled economic growth.

Indonesia’s debt interest burden grows heavier

According to CEIC data, Indonesia’s debt-to-GDP ratio stands at 40.75%, lower than many other developing countries. The main problem, however, is the cost of servicing that debt’s interest.

Local media recently reported that almost a quarter of tax revenue in 2026 will be used to pay debt interest — more than double the ratio recommended by the International Monetary Fund (IMF).

Indonesia also lags behind South-East Asian countries such as Thailand, Vietnam and the Philippines in terms of tax revenue.

Jakarta also faces significant refinancing pressure, with government debt worth around Rp834 trillion, or US$46.1 billion, falling due this year, according to the economic outlet Kontan.

“The government genuinely wants to accelerate economic growth,” wrote Arianto Patunru, a researcher at the Indonesia Project at the Australian National University, in a recent blog post. “But ambition is no substitute for credibility.”

The potential of being abandoned by investors

Concerns about that credibility have already been reflected in the assessments of rating agencies. Earlier this year, Moody’s and Fitch downgraded Indonesia’s outlook to negative, judging that the acceleration of Prabowo’s government spending carries fiscal risks.

MSCI, the US-based financial services company that manages benchmark indices used by global investors to track the domestic stock market, warned in January that Indonesia risked being downgraded from emerging-market status to frontier-market status.

MSCI complained about the lack of ownership transparency at several companies listed on the Indonesia Stock Exchange, as well as suspected coordinated trading patterns. These conditions are considered to make it difficult for investors to ascertain the true number of shares in circulation and to reduce confidence in price formation in the market.

In a further deterioration, S&P Global Ratings warned last week (9 July 2026) that it may also announce a similar downgrade due to transparency issues.

Such a change of status would be a heavy blow to one of the fastest-growing economies in the G20, as many institutional investors avoid frontier-market status.

“A downgrade … would have very serious implications … because Indonesia would fall off the radar of investors focused on emerging markets, precisely when the country badly needs additional capital to drive economic growth,” said Shidiq.

Although falling oil prices are expected to help stabilise state finances, Prabowo still faces enormous pressure to rein in his spending ambitions. Siwage Dharma Negara, a senior researcher at the Singapore-based ISEAS – Yusof Ishak Institute, doubts this will actually happen.

“I think populist spending will continue to rise faster than the growth of state revenue,” Negara told DW. “If this trend continues, the market will view Indonesia as a high-risk investment destination.”

The trauma of the 1998 crisis looms

The Asian Financial Crisis taught Indonesia an important lesson about the importance of fiscal prudence. High debt, crony practices and weak banking oversight made Indonesia the hardest-hit country when the crisis struck, as several Asian economies collapsed simultaneously.

The rupiah lost more than 80% of its value, while Indonesia’s economy contracted by up to 13%, sparking riots that killed many people and forcing the US-backed dictator Suharto to resign.

Having learned from that experience about the importance of strengthening financial institutions and tightening regulation, investors now worry that some of the hard-won principles of prudence are starting to erode.

Although Jakarta is not at risk of repeating a crisis on the scale of the late 1990s, Indonesia is expected to struggle to reach its 5% economic growth target this year, let alone achieve the ambitious 8% target.

Negara warned that investor confidence “could deteriorate rapidly if governance problems, fiscal risks and pressure on the exchange rate reinforce one another, as happened in 1998”.

Patunru of the Australian National University even told DW that if Prabowo fails to control his ambitions, Indonesia’s economic prospects risk shifting from a “slow-motion loss” to a “free fall”.