President Prabowo Subianto's recent decisions to challenge Indonesia's traditional economic boundaries have caused concern in the financial markets for some time. The latest drop in market performance seems to indicate that investors are growing impatient.
The President's introduction of policies involving populist spending, attempts to weaken the independence of the central bank, and aggressive measures towards foreign companies like Apple Inc. have been unsettling. Additionally, he has accelerated legislation to expand the military's influence, leading to student demonstrations in Jakarta.
The situation escalated when there were rumors that Finance Minister Sri Mulyani Indrawati, known for her prudent fiscal management during her long tenure, might resign. This led to a significant decline in the stock market, prompting government officials and Indrawati herself to dispel the speculation. Bank Indonesia had to intervene to stabilize the depreciating rupiah, which is currently the worst-performing currency in Asia.
These rumors have heightened concerns about a purge of reformist figures and have put a spotlight on the economic challenges facing the country. Despite some market recovery afterward, investors remain wary of the President's policies, especially given external pressures like potential US tariffs and diminishing Chinese demand for Indonesian commodities.
The Jakarta Composite Index experienced a substantial decline, making it one of the weakest-performing stock indices in Asia. Foreign investment outflows from Indonesia have reached $1.9 billion this year, highlighting the unease among investors.
Investors are particularly worried about the country's fiscal prospects. Indonesia, previously categorized as one of the "Fragile Five" countries susceptible to volatile foreign investment flows, had improved its credibility with investors by demonstrating sound economic management that raised its credit rating. However, Prabowo's recent policy choices risk reversing this progress, potentially pushing the budget deficit closer to the legal limit of 3% of GDP. Additionally, his decision to expand the cabinet and consider raising the value-added tax rate, later rescinded due to public resistance, have added to investor concerns.