Economy, explained.
Mufid Majnun/Unsplash
Indonesia is settling more trade in local currencies, having learnt the hard way in 1997–98 that foreign currency borrowing can turn a falling rupiah into a crisis.
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Indonesia is dodging the dollar in trade – not in debtIndonesia is dodging the dollar in trade – not in debt
Jakarta’s benchmark share index fell 11.6% (Opens in new window) on 16 October and lost further ground on the next trading day. The sell-off followed MSCI’s proposal (Opens in new window) to reclassify Indonesia from emerging to standalone market status over unclear share ownership and suspected coordinated trading. By 19 October, selling had spread to government bonds, pushing the 10-year yield to about 7.4%, while the rupiah weakened to 18,030 per US dollar, close to June’s record low.
UBS estimated, according to Reuters (Opens in new window), that index-tracking funds could sell about US$4 billion of Indonesian shares if the reclassification goes ahead, adding currency pressure as investors convert sale proceeds into foreign currency.
An earlier depreciation in June had reflected global turmoil over the Middle East war and capital outflows, prompting Bank Indonesia to curb dollar demand. From 1 July (Opens in new window), bank customers using rupiah to buy foreign currency needed documents showing an underlying transaction if their monthly purchases exceeded the equivalent of US$10,000. The rule covers purchases for delivery within two working days, with import invoices among the documents accepted as evidence.
The more Indonesia trades without dollars, the easier it becomes to overlook how much of its private foreign debt is still owed in them.
Bank Indonesia’s local currency transaction framework (Opens in new window) seeks to make the rupiah less vulnerable to shifts in dollar demand by allowing trade and direct investment payments in rupiah or a partner’s currency. An importer buying from China can therefore pay in rupiah or renminbi, potentially saving the cost of converting through dollars. Indonesia’s seven partners (Opens in new window) are China, Japan, South Korea, Malaysia, Thailand, the United Arab Emirates and Singapore, whose bilateral arrangement with Indonesia (Opens in new window) started on 31 August.
Payments under the framework reached the equivalent of US$49.4 billion (Opens in new window) in the first eight months of 2026, nearly double the total for 2025. Governor Destry Damayanti told Reuters that about three-quarters were in renminbi (Opens in new window), leaving the shift heavily dependent on China’s currency. Changing the currency used for trade, however, does not change the currency in which existing debts must be repaid.
Indonesia paid dearly for currency mismatches during the Asian financial crisis (Opens in new window), when many firms earned rupiah while owing dollars. The rupiah lost about 70% of its value in six months, sharply raising repayment burdens for firms with unhedged foreign currency debts.
Under rules implemented in 2015 and tightened in 2016 (Opens in new window), non-bank firms in Indonesia borrowing abroad in foreign currency must hold foreign currency assets covering at least 70% of foreign currency debts due within three months. They must generally also hedge at least a quarter of any shortfall of foreign currency assets against near-term debts, which limits losses if the rupiah falls.
Rush hour at Juanda Station, Jakarta (Firmandan Wijaya/Unsplash)
Indonesia's dollar obligations remain substantial, with provisional figures (Opens in new window) of US$164.3 billion in July 2026 representing 84.5% of total private external debt. Renminbi borrowing offers another way to reduce dollar dependence, with private debt in that currency rising from the equivalent of US$2.3 billion at end-2019 to US$16.2 billion in July. Whether that growth reduces currency risk depends on borrowers’ revenues, which these aggregate debt figures do not identify.
Nor do these gross totals show how many dollars borrowers must still obtain for repayments after allowing for available dollar funds and expected receipts, including those secured through hedging. Bank Indonesia could build on the quarterly reports (Opens in new window) that non-bank firms already submit to estimate and publish their remaining dollar needs over the next six months.
A clearer picture of corporate dollar needs would also help assess how far Bank Indonesia might have to draw on its gross reserves, which stood at US$146.3 billion (Opens in new window) at end-September. The IMF (Opens in new window)’s January 2026 report described the financial system as broadly resilient, while AMRO (Opens in new window) judged reserves above conventional adequacy benchmarks in August. Reserves had nevertheless fallen by more than US$11 billion between end-2025 (Opens in new window) and May 2026 (Opens in new window), amid government debt repayments and support for the rupiah.
Sustained outflows can erode even large reserves, especially when domestic residents also seek foreign currency, as China’s experience illustrates. Its foreign exchange reserves fell by roughly US$1 trillion between mid-2014 and January 2017 (Opens in new window), reflecting intervention amid large capital outflows, as well as valuation losses (Opens in new window).
Bank Indonesia can also turn to international arrangements for emergency dollars, including the Federal Reserve’s repo facility for foreign central banks, which it joined in April 2020 (Opens in new window). The facility, made permanent in 2021 (Opens in new window), lets approved central banks borrow dollars temporarily against US Treasury holdings at the New York Fed instead of selling them outright. Regional support through the Chiang Mai Initiative Multilateralisation (Opens in new window) offers another backstop, although it has undergone exercises (Opens in new window) without ever being activated in a crisis.
Beyond reserve adequacy and these liquidity arrangements, a central bank’s ability to use its own reserves depends on where they are held, as Russia discovered when sanctions immobilised around €260 billion (Opens in new window) of its reserves after the 2022 invasion of Ukraine. Despite diversifying into renminbi and domestically held gold (Opens in new window), Russia had retained euro and other assets within sanctioning jurisdictions, leaving those holdings exposed.
While Indonesia does not face comparable sanctions, in the current geoeconomic climate its reserve managers, like their regional counterparts, cannot afford complacency about their ability to use reserves held abroad. Preparing for renewed pressure on the rupiah requires a clearer account of borrowers’ net dollar needs and of the funds that can be mobilised to meet them. The more Indonesia trades without dollars, the easier it becomes to overlook how much of its private foreign debt is still owed in them.
About the author
Ramkishen S. Rajan
Ramkishen S. Rajan is Yong Pung How Professor at the Lee Kuan Yew School of Public Policy, National University of Singapore.
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