Since the pandemic, Indonesia has recorded steady annual growth of 5%. Then, Iran closed the Strait of Hormuz.
Since Southeast Asia’s largest economy is still heavily dependent on imported fuel despite having its own oil reserves, the Indonesian government suffered an immediate blow.
The cost of fuel subsidies, for which ministers had budgeted about $22 billion (€19.2 billion), skyrocketed. The Reuters news agency reported in March that policymakers would need an additional $6 billion or more to keep prices stable.
The national currency, the rupee, fell 8% against the dollar to a record low near 18,000. The Jakarta stock exchange, which had been headed for a record above 9,000, fell by a third, becoming the worst-performing stock exchange this year.
Foreign investors withdrew billions of dollars from Indonesian assets. financial Times It was calculated that global funds sold a net $3.9 billion worth of shares this year – the biggest selloff since just before the Asian financial crisis of 1997-98.
Markets were spooked by rising energy costs coupled with populist President Prabowo Subianto’s huge spending promises.
Markets get a boost from populist spending
During his 2024 election campaign, Prabowo promised to boost economic growth to 8% by spending trillions of rupees on housing, education and health.
Since being elected, he has also launched a new sovereign wealth fund, which manages about $900 billion of assets.
While the additional funding received strong political and public support, investors and other experts were concerned. Rizal Shidik, a Netherlands-based economist at Leiden University, described Prabowo’s policies as “overly ambitious” and “inefficient”.
“The market views the president’s major programs as a significant strain on an already tight fiscal position,” Shiddick told DW. He said the Hormuz closure made spending plans look “increasingly untenable”.
Indonesia has thrived on steady growth for years thanks to a prudent budget and a deficit limit of 3% of gross domestic product (GDP). But Prabowo’s government has been criticized for relying on large deficits and pushing the country towards unsustainable development by debt.
Have to bear heavy burden of loan interest
According to CEIC data, Indonesia’s debt-to-GDP ratio is 40.75%, lower than many emerging-market competitors. But the cost of repaying that loan is the real problem.
Local media recently reported that nearly a quarter of all tax receipts in 2026 will go to interest payments – more than double the proportion recommended by the International Monetary Fund.
Indonesia also lags behind Southeast Asian peers such as Thailand, Vietnam and the Philippines in terms of collecting tax revenue.
Jakarta is also facing heavy refinancing pressure, with about 834 trillion rupiah ($46.1 billion, €40.3 billion) of government debt maturing this year, according to financial news outlet Konton.
“The government is right to want faster growth,” Ariyanto Patunru, a fellow at the Australian National University’s Indonesia Project, wrote in a recent blog post. “But ambition is no substitute for credibility.”
Downgrade will increase capital flight
Those credibility concerns had already been raised by rating agencies. Earlier this year, Moody’s and Fitch downgraded Indonesia’s outlook to negative, citing risks from Prabowo’s rapid spending increases.
US-based finance company MSCI, which owns the benchmark index used by investors to track domestic stocks, warned in January that Indonesia risked being downgraded from an emerging market to a frontier economy.
MSCI complained that ownership details of some Jakarta-listed companies were too opaque, while some trading appeared coordinated. This made it difficult for investors to know the actual number of shares for sale and trust market prices.
In another embarrassment, S&P Global Ratings warned last week (July 9, 2026) that it too could announce a similar downgrade, citing transparency issues.
A change in position would be a real blow to one of the fastest growing economies in the G20, as many institutional investors avoid frontier markets.
“The grade downgrade… would be serious… as the country would fall off the radar of investors specializing in emerging economies at exactly the time it desperately needs more capital for growth,” Shidik told DW.
While falling oil prices will now help stabilize public finances, Prabowo still faces intense pressure to rein in his ambitions, to which Siwaj Dharma Negara, senior fellow at the Singapore-based Institute of Southeast Asian Studies (ISEAS) – Yusof Ishak Institute, doubts he will fully heed.
“I think populist spending will continue to grow faster than state revenue collections,” Negara told DW. “With this current trend, markets will view Indonesia as a high-risk destination.”
Fiscal crisis brings back memories of 1998
The Asian financial crisis taught Indonesia a lasting lesson on fiscal prudence. The country suffered the most from the crash – in which many Asian economies collapsed simultaneously – due to heavy debt, crony capitalism and weak bank supervision.
The rupiah lost more than 80% of its value and the Indonesian economy declined by 13%, sparking deadly riots and forcing then-US-backed dictator Suharto from office.
Having learned about the need for stronger financial institutions and tighter regulation, investors are concerned that some of the hard-won wisdom is being eroded.
Although Jakarta does not risk repeating the excesses of the crisis years, it will struggle to meet its 5% growth target this year, let alone the much-anticipated 8%.
Negara warned that investor confidence “could deteriorate rapidly if governance concerns, fiscal risks and currency pressures reinforce each other as they did in 1998.”
Australian National University’s Patunru told DW that if Prabowo doesn’t curb his enthusiasm, Indonesia’s economic fortunes risk heading into a free fall from “slow damage.”
Edited by: Andreas Becker