News analysis
Indonesia, faced with Prabowo policies, ‘stock frying’, left behind in rush to emerging markets
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Indonesia’s equity bourse has lost nearly 12 per cent in value following risks of a ratings downgrade.
PHOTO: AFP
- Indonesian markets face turmoil; the stock market has declined by nearly 12 per cent amid investor concerns over transparency and governance.
- Prabowo's policies, including increased spending and appointments, raise fears of undoing progress since the Asian financial crisis, impacting investor confidence.
- MSCI warned of a potential downgrade, while proposed regulatory changes are seen as insufficient, highlighting concerns about execution and fiscal discipline.
AI generated
JAKARTA – A stock market collapse is only the latest sign of trouble for Indonesia’s capital markets, which are being excluded from a rush to emerging economies, as investors cool on South-east Asia’s biggest economy and Indonesian President Prabowo Subianto’s economic agenda.
Indonesia’s equity bourse has lost almost 12 per cent
Vows to make changes and the resignations of five top officials
Investors have been avoiding Indonesia and worry Mr Prabowo’s spending and cosy governance are slowly undoing hard-won progress made since the Asian financial crisis, when the rupiah collapsed and Mr Prabowo’s former father-in-law, Suharto, was forced from office.
Foreigners own barely more than 13 per cent of the bond market, down from nearly 40 per cent as recently as 2019, according to government data.
They have left gradually, but the latest hit to confidence is particularly ill-timed because, as US rates fall, global money is pouring into emerging markets at a record clip and sending stocks and currencies in Latin America soaring.
Mr Prabowo, meanwhile, has been remaking Indonesia in ways that are reminiscent of the strongman era when he cut his teeth. He has expanded military spending and its involvement in the government.
On the economic front, he appointed his nephew
The rupiah hit a record low
“The music is definitely darkening,” said Mr Alan Siow, co-head of emerging markets corporate debt at fund manager Ninety One.
“The issue is the steps to purgatory,” he said. “The first few will always seem innocent. And then suddenly you’re there, and then you’re like, ‘Oh, how did we get here?’ Sri’s departure was the first signal
Foreign investors net sold almost 14 trillion rupiah (S$1 billion) worth of Indonesian stocks in 2025, the heaviest year for outflows since 2020, and offloaded another US$783 million in January, according to LSEG data. Foreigners net sold about US$6.4 billion in Indonesian bonds in 2025.
Copley Fund Research, a firm tracking the positioning of 356 active global emerging market funds, found the number of funds that opted to invest in Indonesian stocks fell 7.6 per cent in 2025, and the number of funds that were “overweight” fell more than 17 per cent, the largest single negative country change on both counts.
‘Stock frying’
At issue in the equity market is a practice brokers have dubbed “goreng-goreng saham”, or stock frying, where trading between related parties pumps up a stock’s price.
To address it, the authorities have proposed expanding disclosure requirements for big shareholders, while doubling the “free float” or tradable shares of listed companies to 15 per cent.
But that requires companies to shake out their share registries to get more stock into the market.
Investors have welcomed the gestures, but they worry that it might not satisfy MSCI, which has frozen Indonesian securities in its products and has not responded to the proposals publicly.
“If the companies are not going to do it, then we’re back to square one,” said Mr William Yuen, a Hong Kong-based investment director at Invesco, which manages nearly US$2.2 trillion.
“I think we really need to see a little bit more on the actual execution and implementation. Otherwise, I think the overhang (for markets) will remain.”
Weakening commitment
For the bond market, popular spending programmes on school lunches and defence are putting pressure on debt limits that have held firm since the financial crisis, which is troubling to investors.
Indonesia’s budget deficit is low in global terms, but at 2.92 per cent in 2025, it is uncomfortably close to the statutory cap of 3 per cent, and investors would like to see that held.
“A lot depends on how policy is conducted in the next few months,” said Mr Johnny Chen, portfolio manager at William Blair.
“We need to see policy being conducted in a very credible manner that suggests that fiscal discipline and central bank credibility that we’ve been so accustomed to will continue.”
To be sure, Indonesia is running large trade surpluses, and has an ample US$156.5 billion in foreign exchange reserves. Wholesale capital flight or a sudden downgrade to frontier status are prospects that are regarded as unlikely.
Still, momentum can be a dangerous thing in markets.
“That orthodoxy that Indonesia has followed since the Asian financial crisis is something that is positive... I think emerging market equities and bonds investors appreciated that,” said Mr Rajeev De Mello, Singapore-based chief investment officer at GAMA Asset Management, who is underweight on the currency, stocks and bonds.
“There is a perception that it’s weakened, that commitment to it is weakening.” REUTERS
