For several months, President Prabowo Subianto’s actions aimed at altering Indonesia’s longstanding economic frameworks have created unease in financial markets. A significant market downturn this week has highlighted investor frustration.
Prabowo, a former general, has been unsettling economic observers with his populist expenditures, initiatives to reduce the central bank’s autonomy, and stringent measures against international businesses such as Apple Inc. He has expedited legislation to enhance the military’s role, prompting large student demonstrations in Jakarta.
A pivotal moment occurred when rumors circulated that Finance Minister Sri Mulyani Indrawati, who has been a fiscal disciplinarian during her cumulative 14 years in office, might resign. This speculation caused the stock market to experience its largest decline in three years. In response, government officials, along with Indrawati, made statements to quell the rumors. Bank Indonesia was compelled to intervene to stabilize the rupiah, which has been Asia’s weakest currency this year.
John Foo, founder of Valverde Investment Partners Pte., noted that these rumors have amplified fears about the potential marginalization of reformists and highlighted the underlying economic issues facing the nation.
Despite some stabilization in the markets subsequently, investor confidence remains shaky due to Prabowo’s policy decisions, particularly amid the challenges from U.S. President Donald Trump’s tariff policies and decreased demand from China for raw materials.
Investors are primarily focused on Indonesia’s fiscal future. Previously labeled by Morgan Stanley as one of the “Fragile Five” economies susceptible to volatile foreign sentiment, Indonesia had gradually bolstered its investment credibility through prudent economic governance, improving its credit rating beyond junk status.
However, Prabowo’s current policies risk disrupting this progress. Since assuming office in October, his strategies could edge the budget deficit toward its 3% of GDP legal limit. He has expanded his cabinet significantly compared to his predecessor, Joko Widodo, and, following public backlash, reversed a decision to increase the value-added tax, which was aimed at boosting government revenue.
Prabowo has implemented a free lunch initiative for students—a key campaign promise—costing $30 billion annually, equivalent to 14% of the national 2024 budget. To finance this, he has cut funds from areas such as infrastructure and travel.
Achmad Sukarsono, a lead analyst for Control Risks in Indonesia, expressed concerns about the soundness of the country’s economic policies, indicating that many policies lack strong economic foundations.
Prabowo’s office did not promptly provide a comment.
The government’s delayed release of monthly budget data for January raised questions about its financial condition. Once released, the data revealed an unexpected deficit due to dwindling revenues and expenditures.
This fiscal status undermines Prabowo’s primary economic goal of achieving 8% growth, which analysts deem unrealistic, predicting closer to 5% growth this year.
Aditya Perdana, a political lecturer at the University of Indonesia, remarked that while Prabowo remains committed to his populist campaign pledges, their uneven execution might require the government to reassess its strategies to preserve credibility.
Prabowo’s establishment of a sovereign wealth fund, Danantara, raises additional concerns. The fund, set to control state-owned enterprises and invest across industries, will receive $20 billion from the current budget and be managed by business allies reporting directly to the president.
Prabowo’s actions seem contrary to the democratic reforms implemented after the fall of former dictator Suharto, who led Indonesia for three decades until his ouster amid protests in the late 1990s.
His parliamentary allies quickly passed a controversial law broadening the military’s role, drawing criticism for echoes of the country’s authoritarian history. Student protests followed in Jakarta, with participants expressing opposition through stones, graffiti, and burning tires.
Investor reactions to the law reflect apprehensions about potential shifts in Indonesia’s democratic and governance pathways, according to Mohit Mirpuri, a senior partner at SGMC Capital Pte Ltd.
Citigroup Inc. analyst Ferry Wong cautioned that these protests could contribute to market uncertainty.
Discussions around potentially broadening the central bank’s objectives have reignited worries over Bank Indonesia’s independence following earlier proposals in the financial sector omnibus law. Governor Perry Warjiyo stated that forthcoming changes would emphasize, but not fundamentally alter, the bank’s current objectives.
Despite these challenges, Prabowo faces no immediate threat due to his substantial parliamentary majority, with the opposition still providing legislative support for measures like the military law. State revenues are projected to rebound in March, as reassured by Indrawati on Tuesday. The government remains committed to limiting its budget deficit to 2.5% of GDP this year, under the legal threshold.
It remains uncertain if these reassurances will alleviate investor concerns.
Aditya Perdana from the University of Indonesia emphasized that this serves as a clear warning, advocating for measures to prevent further deterioration, while highlighting the ongoing issue of poor implementation.
This account was initially published on Fortune.com.
