Opinion - Indonesia’s economy is starting to lose the confidence game

KUALA LUMPUR, 21 JULY 2026 —

Bank Indonesia raised its benchmark interest rate to 5.75 per cent within a month, yet the rupiah has still breached 18,000 per dollar.

The currency’s drop from 17,685 per dollar at the start of the tightening cycle on May 20 has accelerated into what analysts describe as an extreme overshooting driven by panic and a shortage of dollar liquidity.

Even aggressive monetary tightening has structural limits, according to economists, because higher rates suppress growth and cannot reverse a self-reinforcing sell-off once confidence evaporates.

The episode echoes the 1997–1998 Asian Financial Crisis, when Bank Indonesia pushed rates above 40 per cent and overnight interbank rates briefly hit 100 per cent.

Those hikes failed to stabilise the rupiah until the government enacted broad structural reforms—bank recapitalisation, deposit guarantees, fiscal discipline and stricter supervision—that restored investor trust.

By early 1998 the rupiah had fallen to nearly Rp 17,000 per dollar; by year-end it recovered to Rp 8,000–9,000 as confidence returned.

The enduring lesson, economists say, is that rates alone cannot halt a currency crisis without credible structural change.

President Prabowo Subianto’s administration has introduced policies that international investors view as controversial and inconsistent, further undermining trust.

Bureaucratic and state-owned enterprise appointments have sidelined meritocracy, while the free nutritious meal programme faces accusations of patronage and inefficiency.

Investor confidence, analysts argue, rests on the rule of law, policy consistency and institutional integrity—areas now under scrutiny.

A recent amendment to the Financial Sector Development and Strengthening Law shields buyers of Danantara’s Red and White bonds from prosecution, civil suits and tax investigations.

The law also bars the Financial Transaction Reports and Analysis Centre from examining these transactions or admitting purchase records as court evidence.

Without safeguards, Danantara risks becoming Indonesia’s largest legally sanctioned money-laundering conduit, analysts warn.

MSCI’s March review of the Indonesia Stock Exchange identified governance gaps—opaque ownership, low public floats and suspected coordinated trading—that led to delistings.

The Capital Markets and Financial Institutions Supervisory Agency has cited these failings as a breach of international standards.

MSCI will issue its final review in November, but capital has already flowed out at speed.

The IDX Composite index fell 34.7 per cent in the first half of 2026, making it Asia’s worst-performing market and signalling a deeper loss of confidence than the currency slide alone suggests.

Related: Bank Indonesia