Indonesia’s Markets Spiral Into a ‘Doom-Loop’ as Prabowo’s Bold Policies Backfire

Investor confidence in Indonesia has taken a sharp hit. A global energy shock combined with unorthodox governance moves like funneling commodity exports through a presidential sovereign fund and rewriting the central bank’s mandate has sent the rupiah and stock markets into a dangerous downward spiral.

Indonesia’s Growth Dream Unravels Under Prabowo

President Prabowo Subianto came to power in 2024 with a bold vision free meals for millions of schoolchildren and aggressive economic growth. But today, that dream looks increasingly fragile. Investors are losing faith fast, and a free-falling currency threatens to undo everything he set out to build.

The former special forces commander has run what many describe as a chaotic administration. He dismantled decades of fiscal discipline in pursuit of lofty growth targets. Now, a combination of global headwinds and his own controversial policy moves are coming back to haunt him.

The Rupiah in Freefall : A Record Low and Counting

Indonesia’s currency the rupiah now trades at 18,190 per US dollar, a historic low. It has shed 8% of its value this year alone. Since the Iran war erupted, it has fallen another 7%. Over the past three weeks, its decline gathered alarming speed its steepest drop since 2020.

The stock market tells an equally grim story. Indonesia’s equity benchmark is the world’s worst performer in 2026 down more than 42%. Even a hefty 50-basis-point interest rate hike in May and a $12 billion draw-down of foreign exchange reserves have failed to stop the bleeding.

“Indonesia is suffering from a genuine confidence crisis, with serious governance red flags that overshadow any valuation argument,” said Tan Altundag, investment manager for emerging equities at Pictet Asset Management, which has aggressively cut its exposure to Indonesian stocks.

“The rupiah at 18,000/USD is not just eroding real returns for foreign investors … the currency slide risks becoming a self-reinforcing loop, pushing up inflation … tightening financial conditions, and ultimately weighing on growth.”

Capital Flight Reaches Levels Not Seen Since 2009

Foreign investors are pulling money out at a pace not seen in over a decade. Net equity outflows reached $3.2 billion through the end of May the heaviest since 2009. Foreign ownership of government bonds has collapsed to just 12.6%, a near 20-year low. Before the COVID-19 pandemic, that figure hovered close to 40%.

“It’s true, there is a doom-loop forming,” said John Woods, Asia chief investment officer at Lombard Odier, a private bank.

“Persistent outflows, with foreign holdings in bonds and stocks at multi-year lows, would continue to pressure the rupiah, liquidity, and asset prices prolonged outflows could slow infrastructure and growth plans.”

Ratings on the Edge Downgrades Loom Large

Indonesia’s credit rating now hangs by a thread. Moody’s and Fitch have both revised their debt outlook to negative pointing to weakened policymaking credibility. S&P has warned that its own rating will hinge on Indonesia’s ability to shore up fiscal buffers. Credit default swaps are already pricing in a possible loss of investment-grade status for Southeast Asia’s biggest economy.

Index provider MSCI is reviewing trading and transparency issues in the equities market. It has warned that a cut to frontier status remains a possibility though most investors consider it unlikely for now.

Any downgrade would force institutional investors into selling a scenario that would push borrowing costs higher and tighten the fiscal noose even further.

Prabowo Doubles Down Despite the Pressure

What concerns markets most is the direction of policy not just the global shock. The Iran war has pummeled energy markets and inflated fuel subsidy costs. Yet rather than recalibrating, Prabowo has doubled down on his costly agenda.

Last week, sweeping new laws not yet fully made public handed parliament powers to direct the central bank. They also added a “real sector growth” mandate to its existing brief. Analysts widely view this as a serious threat to central bank independence.

Prabowo also nominated his own nephew as a deputy governor of the central bank earlier this year.

Last month, he announced that the state would centralize all commodity exports under Danantara a sovereign wealth fund he personally established. The move rattled investors who valued Indonesia’s relatively open commodity markets.

“The underlying concern is that the direction of policy is not great and is becoming less transparent,” said Kieran Curtis, head of emerging markets local debt at Aberdeen in London.

“It is too early to say there has been damage from that policy, but it is not as efficient as exports finding their own market.”

A Negative Spiral And No Easy Way Out

Global pressure from the Iran conflict has amplified Indonesia’s woes. But seasoned investors are clear external shocks alone do not explain the country’s unraveling. The root of the problem is domestic policy.

“Yes, it is possible for countries to pull themselves out of a negative spiral where they have put themselves in that position to begin with,” said Mark Ledger-Evans, Asia-focused emerging markets fixed income portfolio manager at Ninety One.

“In Indonesia’s case, we believe it stems largely from the idea of pursuing growth rates which are not feasible, which then filters down into execution, and hence it’s not so easy to pull out of the negative spiral without a re-think of the ideas.”

Chinese companies the backbone of Indonesia’s world-dominant nickel industry are already exploring alternatives elsewhere. Rising policy risk has made Indonesia a less attractive destination. If foreign investors do return, they will demand significantly better valuations.

“Indonesia is no longer being priced as a reliably orthodox emerging market,” said Hemant Mishr, chief investment officer at fund manager S CUBE Capital, “but as one carrying rising policy risk.”