In a move that has intensified market anxiety, President Prabowo Subianto is reshaping Indonesia’s economic landscape, leading to a sharp decline in investor confidence. The recent sell-off indicates that stakeholders are increasingly concerned about governance and economic stability.
Prabowo’s populist initiatives, which include plans to curb the central bank’s independence and aggressive policies targeting foreign businesses, have stirred controversy. His efforts to expand military influence sparked significant student protests in Jakarta, reflecting growing public dissent.
The situation escalated earlier this week following speculation regarding the potential resignation of Finance Minister Sri Mulyani Indrawati, who has been pivotal in maintaining fiscal discipline. This uncertainty contributed to a significant plunge in the stock market, with the Jakarta Composite Index recording its largest drop in three years. In response, Bank Indonesia had to intervene to stabilize the rupiah, which has fared poorly against other currencies this year.
Market analysts highlight that these developments have reignited fears of a regression in economic reforms, exacerbating existing economic challenges. “The rumors have rekindled concerns about reformist elements being sidelined,” noted an investment expert.
Despite a brief recovery in markets, investor apprehension persists amidst external pressures, including tariff threats from the U.S. and diminishing demand from China for Indonesia’s raw materials. The Jakarta Composite Index declined by 2.6% on Friday, marking it as one of the poorest-performing stock indices in Asia this year.
Investor focus now pivots to the country’s fiscal outlook. Indonesia, once classified as part of the “Fragile Five” due to its susceptibility to foreign investment fluctuations, has improved its reputation over recent years. However, Prabowo’s recent policy actions risk reversing this progress, potentially pushing the budget deficit to its legal limit of 3% of GDP. Notably, he has expanded his cabinet significantly and later retracted a proposed increase in value-added tax after public backlash.
His introduction of a free lunch program for students comes with a hefty price tag of $30 billion annually, accounting for 14% of the proposed 2024 budget. To fund this initiative, spending in other critical sectors is being reduced, raising concerns among financial analysts.
“Market stakeholders are wary of hasty economic policies that lack a solid foundation,” emphasized a lead analyst for the region.
Meanwhile, the delayed release of monthly budget figures has led to further speculation regarding the government’s financial health, with recent data revealing a surprising deficit due to falling revenues and expenditures.
Prabowo’s ambitious goal of achieving an 8% economic growth rate appears increasingly unattainable, with analysts predicting around 5% growth for the year. Observers suggest that addressing these economic challenges will require the government to recalibrate its approach to maintain investor confidence.
The establishment of a sovereign wealth fund, Danantara, further adds to investor concerns. This fund, with a mandate to control state-owned enterprises and invest across sectors, is set to receive $20 billion from the budget, raising questions about its governance and oversight.
Although the bond market has attracted over $850 million in inflows this year, the rupiah remains the weakest currency in Southeast Asia, having depreciated by more than 2.4%. The yield on 10-year government bonds increased by 17 basis points this week, signaling investor nervousness.
Prabowo’s current trajectory appears to diverge from the reforms implemented post-Suharto’s dictatorship aimed at securing investor and public trust. Recent legislative moves to enhance military power despite widespread dissent have sparked significant protests, highlighting the tensions between governmental authority and civil liberties.
Investor sentiment remains cautious regarding potential shifts in Indonesia’s democratic framework and governance. “This may contribute to uncertainty in the market,” remarked an analyst.
Even as the government signals a potential recovery in revenue by March, the need for effective fiscal management is critical. Experts advocate for corrective measures to safeguard the nation’s financial stability and sustain investor confidence.
