Indonesia has failed to negotiate down its 32 per cent tariff levels from April even after some last minute concessions by the Indonesian government. Indonesia has a small trade exposure to the US but is constrained by market aversion to volatility and uncertainty more than others. Prabowo’s populist approach to governing and Indonesia’s tepid economic outlook are also cause for concern. The mix of bad policy, weaker domestic conditions, and a more risk-prone external environment are sure to weigh on Indonesia’s outlook going forward.
The economy is still chugging along. But scratch beneath the surface, and signs of stress appear.
In March, the Indonesian Rupiah fell to levels not seen since the Asian Financial Crisis and central bank intervention was needed to stabilise the currency after President Donald Trump’s “Liberation Day” announcement. While depreciation pressures have abated a little, the Rupiah is still one of the worst performing emerging-market currencies this year. The stock market has also performed poorly.
While not reliant on trade with the US, the second-order impacts of tariffs on China – Indonesia’s largest trading and investment partner – and the global economy would be more painful. This would weigh on commodity prices and reduce demand for Indonesian exports, shrinking tax revenues and deterring foreign investment.
But international chaos is not the only driver behind Indonesia’s poor market performance this year. President Prabowo Subianto branded himself as the natural heir to his predecessor, Joko “Jokowi” Widodo, but is now consolidating a political legacy in a process of “De-Jokowi-sation”. Prabowo’s desire to strike his own path has been met with market ructions.
Prabowo announced a new sovereign wealth fund in February 2025, dubbed “Danantara”, that acts as a holding company for the country’s many state-owned enterprises. The new institution has less transparency and fewer safeguards than Indonesia’s first sovereign wealth fund and sits directly under the President’s office while bypassing the Ministry of Finance. This centralises control of key state assets and organisations towards the President and reduces influence of a key technocratic institution. The administration also rushed through legal revisions that loosened restrictions on active military officers holding government posts. Both announcements triggered negative market reactions and are seen as a regression from Jokowi-era and Reformasi norms, and a reversion to authoritarian tendencies in the New Order era.
The current administration has also moved away from Jokowi-era infrastructure spending to focus on lower-income groups and food security, with the free nutritious meals program a flagship initiative. While the program is politically popular, questions about its fiscal sustainability and efficacy have plagued its rollout. Projected to cost an eye-watering $44 billion annually when fully implemented, eight per cent of the rest of the national budget was cut to finance the policy.
Prabowo’s willingness to take untested policy risks through a command-and-control approach will continue to test market tolerance for populist policies.
Delivery is also being rushed. Reports of improper planning and military involvement confirm a “move fast and break things” approach. This is a high risk strategy for a national program feeding 80 million school children and vulnerable low-income groups – there have already been cases of food poisoning.
Prabowo’s tendency for centralised command-and-control-style policymaking risks undermining civilian bureaucratic independence and alienating investors.
The economy is still chugging along. First-quarter GDP growth slightly moderated in line with expectations. But scratch beneath the surface, and signs of stress appear. Indonesia has one of the lowest tax-to-GDP ratios for an economy with its income level. Government revenue at the beginning of the year was disappointing even by Indonesian standards.
Consumer sentiment and consumption have been soft. A noticeable drop in the number of pemudik – those returning home for Lebaran, a national holiday – signals tightening household budgets. Car sales, often a proxy for middle-class spending, have been persistently low for two years. Job losses in textiles and media are also troubling. The textile sector, once a government priority, has struggled for years to compete internationally. Expectations are for economy-wide layoffs of over 250,000 this year.
A weak labour market is not promising for household income growth.
Indonesia’s middle class, once hailed as a driver of growth, is losing ground. After years of steady poverty reduction, stagnant wages, rising living costs, weaker consumption and declining productivity are putting pressure on households.
While growth remains near Indonesia’s decade-long 5 per cent average, the country needs to lift growth to 6-7 per cent if it wants to meet its own goal of reaching high-income levels by 2045. Prabowo has said he wants 8 per cent growth.
The government has started paying attention, unveiling a wide-ranging stimulus package in May to boost consumption and jumpstart the economy. It’s a mixed bag. Increased food aid and cash transfers for low wage workers provide a targeted way to address short-term economic weakness. Electricity and transport subsidies lack targeting so will cost more than needed. Meanwhile, there is still little on offer from Prabowo to boost productivity, which remains the key to lifting economic growth. Trade negotiations with the US are seeing some positive liberalising concessions by the Indonesian government, although this won’t generate a large enough productivity boost.
Prabowo’s willingness to take risks like pursuing a populist economic agenda through a command-and-control approach that leans on the military would test markets’ tolerance in normal times. The additional uncertainty created by Trump’s tariffs and a weakening outlook for the economy means room for such risk-taking will only shrink further. Will Prabowo listen?
