Indonesia’s capital markets are facing mounting pressure as global investors cool on Southeast Asia’s largest economy, leaving it increasingly out of step with a broader rush into emerging markets. A sharp selloff in equities and a weakening currency have raised concerns about transparency, governance, and President Prabowo Subianto’s policy agenda.
Indonesia’s benchmark index has fallen nearly 12%, wiping out more than $80 billion in market value since index provider MSCI warned the country could be downgraded to frontier-market status over ownership and trading transparency issues. Promises of reform and the resignation of senior officials from the regulator and exchange have failed to steady sentiment, while the rupiah’s slump signals deeper unease.
Investors worry that President Prabowo Subianto’s spending plans and centralized style risk eroding the hard-won orthodoxy built since the Asian Financial Crisis. Foreign ownership of Indonesian bonds has dropped to just over 13%, from nearly 40% in 2019, as global funds redirect capital to faster-rising markets in Latin America.
Concerns intensified after Prabowo reshaped economic institutions, including appointing a relative to the central bank’s board and dismissing respected former finance minister Sri Mulyani Indrawati. The rupiah hit a record low in January, underperforming peers even as risk appetite lifted assets elsewhere.
A key flashpoint is so-called “stock frying”—trading among related parties that artificially inflates prices. Authorities have proposed tighter disclosure rules and a higher free-float requirement, but investors doubt the measures will fully satisfy MSCI. “Without real execution, the overhang remains,” said William Yuen of Invesco.
On the bond side, popular spending programs are pushing the budget deficit close to Indonesia’s legal ceiling, unsettling investors accustomed to strict fiscal discipline. “Policy credibility in the next few months will be critical,” said Johnny Chen of William Blair.
