Indonesia’s President Moves to Control the Central Bank. The Red Flags for Other Markets.

Foreigners have sold $3.7 billion in Indonesian stocks this year, the largest annual outflow ever. Above, stock prices at the Indonesia Stock Exchange, in Jakarta. (Dimas Ardian/Bloomberg)

Key Points

About This Summary

• Indonesia introduced a $1 billion stimulus to stabilize markets after government actions rattled investors.
• Protests arose from economic discontent and controversial policies, including a $3,000 housing allowance for parliament members.
• The shakeup included firing the finance minister and raised concerns about central bank independence.

Indonesia unveiled a $1 billion stimulus package on Tuesday to help steady markets after the government forced out its respected finance minister and adopted unorthodox measures to head off growing economic dissatisfaction and social unrest. But the moves raise questions about central bank independence and have rattled investors.

The iShares MSCI Indonesia exchange-traded fund is down 16% over the past year, in contrast to the 26% gain in the broader iShares MSCI Emerging Markets index. The Indonesian rupiah is the second-worst performing currency in Asia, falling about 1.6% against an already weak dollar. Analysts see more pain ahead.

Trouble has been brewing in southeast Asia’s biggest economy for a while as the country’s working class have not reaped the benefits of relatively strong economic growth over the past decade, manufacturing jobs have dried up, and Indonesia has failed to fully capitalize on global companies’ push to diversify production out of China. Moreover, the government’s focus on developing its commodities sector—especially nickel mining—hasn’t created many jobs, and the middle class has shrunk by a fifth over the past six years, whereas it has grown in many other emerging markets.

Simmering economic discontent around cost of living and other issues turned to a boil this year amid protests over a mix of populist and fiscal austerity policies from President Prabowo Subianto, the ex-son-in-law of former President Suharto, who won in a landslide in 2024. Protests turned violent more recently after the government gave parliament members a $3,000 monthly housing allowance—10 times Jakarta’s minimum wage—and police accidentally killed a delivery driver, which Gavekal analysts Tom Holland and Udith Sikand described as “a lightning rod for popular fury over government cronyism.”

Investors tend to turn a blind eye to social unrest, but that changed with Prabowo’s decision to shake up his cabinet, including firing Finance Minister Sri Mulyani Indrawati, who had served under three presidents and played a critical role in maintaining the country’s fiscal credibility in a country still scarred by the 1997 Asian financial crisis.

Prabowo replaced her with Purbaya Yudhi Sadewa, who has been more willing to push through aggressive fiscal and monetary policies to bolster growth and has announced a $12 billion stimulus package in the form of tax breaks and handouts. The central bank is also embarking on a burden-sharing partnership with the government to finance housing and infrastructure projects, raising questions about its independence.

“At a moment when Trump is pressuring the Federal Reserve to lower U.S. interest rates, officials in Jakarta are defending their own government’s assault on Bank Indonesia’s independence,” writes William Pesek of Yardeni Research. So far, he argues, Prabowo’s handling of the economy “prioritizes control over reforms to increase competitiveness.”

Foreigners have sold $3.7 billion in Indonesian stocks this year, the largest annual outflow ever, according to Gavekal analysts, who see more selling ahead. While rate cuts have supported bond prices, Gavekal analysts note that further cuts could “fuel anxiety that the central bank is acting as a government puppet. This could trigger a reversal, putting pressure on bond yields and currency alike.” The government is also showing little sign of addressing the country’s structural challenges, such as by deregulating manufacturing to draw investment and create jobs, the duo write.

These moves come as many emerging markets like Indonesia have been especially hard hit by President Donald Trump’s tariffs, landing at a time their economies are already struggling. The U.S. imposed a 19% tariff on the Indonesia’s exports.

While the general themes of the protests—corruption, inequality, and weak economic growth—are common to a lot of emerging markets, Jon Harrison, TS Lombard’s managing director of emerging markets macro strategy, doesn’t see Indonesia’s problems sparking a widespread emerging markets crisis like that of the late 1990s. For now, he says, the scope of Indonesia’s fiscal and policy issues are unique to it and the outlook is improving in several other emerging markets.

Still, Harrison says via email that Indonesia’s troubles could raise questions about the broader region as companies think through their investments. And the collapse of Nepal’s government following violent protests there over corruption, a social media ban, and a lack of economic opportunity could add to some of the concerns about the region.

“We may still be some way from seeing the kind of disorderly collapse of government that we had in Nepal, but the protests will obviously invite comparisons, and will mean that companies looking to make foreign direct investments will delay their decisions, when U.S. tariffs already increase the difficulty for companies looking to set up production in Indonesia,” Harrison says.

Indonesia looks poised for a bumpy period. And its troubles could keep investors on alert for other countries grappling with political discontent, rising fiscal deficits, or moves to chip away at central bank independence—not just in emerging markets but also in France and even the U.S.

Write to Reshma Kapadia at reshma.kapadia@barrons.com