By Ankur Banerjee and Yantoultra Ngui
SINGAPORE, Feb 24 (Reuters) – Indonesian authorities have struggled to arrest a creeping loss of confidence in financial markets and recent policy responses appear to have even increased investor unease.
The currency of the biggest economy in Southeast Asia, the rupiah, has been pinned near record lows since President Prabowo Subianto picked his nephew as the central bank’s deputy governor last month.
That appointment and promises of reform after Moody’s downgrade of the sovereign outlook and index provider MSCI’s criticism of equities trading have not impressed investors.
The main stock index has recovered from lows but is down over 3% in 2026, the worst performing benchmark in the region.
Demand at a government debt auction last week was soft and points to what’s at stake: If the government doesn’t get investors on board then it will need to pay more to fund an ambitious spend-to-grow agenda that is already straining its finances.
“Ad-hoc policy doesn’t protect the market, it makes the market impossible to price,” said Fauzan Luthsa, an advisor at Ormit Kelola Nusantara in Jakarta. “The biggest risk is a pattern of policy that is reactive and constantly changing.”
‘MARKETS ARE NOT ASKING FOR PRO-GROWTH POLICIES’
Foreign investors had been wary of Prabowo even before he won office in 2024 on a platform of big government, with spending plans from school lunches to housing.
His administration’s behaviour under pressure from the market is pushing that wariness toward open doubt and weighing on a currency that has dropped about 7% since his election.
Last month, after MSCI’s warning the market risked downgrade to frontier status, five top exchange and regulatory officials resigned in an afternoon.
Their temporary replacements have proposed reforms to free float and stock ownership disclosure rules to restore MSCI’s confidence, which have been well received, especially by state-backed investors such as Danantara and large pension funds.
But the speed and manner of the promises – along with sudden fines for a few alleged stock manipulators – has fed concern over future abrupt shifts, and whether the changes will work. The administration also dismissed out of hand Moody’s criticism that it is unpredictable, and instead doubled down on a goal of boosting annual economic growth from around 5% to 8% by 2029.
“Markets are not asking for pro-growth policies in the short term, what they need is predictability so risks can be calculated,” said Muhammad Rizal Taufikurahman, head of the Center for Macroeconomics and Finance at Institute for Development of Economics and Finance in Indonesia.
“Proof points of recovery are not policy statements, but track record: Two to three quarters with no regulatory surprises.”
BOND MARKET SETS THE TONE
The currency’s level and the cost of sovereign debt will be markers of that record. Both face pressure and can move a long way quickly if confidence falters, with consequences for the cost of capital and the economy.
The yield on the 10-year Indonesian government bond is at 6.458%, having gained 34 basis points this year, while the rupiah is at 16,825 per dollar, lags its peers and would be in uncharted territory if it broke 17,000.
“If foreign investors sell (sovereign debt) aggressively and yields jump, pressure on the rupiah will deepen,” said Muhammad Wafi, head of research at Korea Investment and Sekuritas Indonesia.
“The equity market is merely a derivative of that macro stability. If the bond market becomes turbulent, the stock market will certainly come under deeper pressure.”
Markets have been unconvinced of the rationale behind Prabowo’s $20 billion free meals programme, seen risking decades of deficit control, and unsettled by other decisions such as cuts to mining quotas or land seizures and company permit suspensions.
“What matters most for markets is observable behaviour: the communications, policy framework, and concrete actions,” said Alessia Berardi, head of global macroeconomics at Amundi Investment Institute – the research arm of Europe’s biggest asset manager.
Berardi said if the leadership signals policies that focus on fiscal financing, tolerate higher inflation, or frequently uses the central bank to smooth fiscal operations, then “perceptions will harden and risk premiums will rise.”
To be sure, a modest increase in yields does not signal a crisis and may even attract capital. Still, foreign capital is leaving the market and investors see government decisions ratcheting risks higher.
“I do feel like each of these steps is a little nick, a little cut that could add up into something bigger,” said James Athey, fixed income fund manager at Marlborough, who has for now shelved thoughts of increasing Indonesia exposure in his book.
“What we’ve had recently I think is going to keep me sidelined for a bit longer,” he said. “Because it’s a hard one to price.”
(Reporting by Ankur Banerjee, Yantoultra Ngui and Rae Wee in Singapore; Editing by Raju Gopalakrishnan)
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