JAKARTA, June 14, (V7N): Indonesia’s economy faces mounting pressure from high energy costs and policy uncertainty, with critics warning that government moves are unnerving investors at a critical moment.

As a net oil importer, Southeast Asia’s largest economy was hit hard by the global crude surge fueled by the Middle East war. To shield citizens, the government has maintained costly fuel subsidies and a multi-billion-dollar school meal program criticized as wasteful and linked to mass food poisoning cases.

Investor Confidence Shaken  

At a time when Indonesia needs foreign currency, authorities spooked markets with tighter export controls labeled “resource nationalism.” Parliament’s move to tighten oversight of Bank Indonesia also raised fears over central bank independence.

The impact has been severe. The rupiah hit successive record lows this week, dropping below 18,100 per US dollar. The Jakarta stock market has lost about one-third of its value since January — one of the world’s worst performances — as traders increasingly “sell Indonesia.”

There was brief relief after Bank Indonesia raised its base lending rate by 75 basis points in back-to-back hikes. But analysts say concerns remain. 

“Investor concerns over recent domestic policy moves will persist,” BMI, a Fitch Solutions unit, said. The rupiah is still about 7% weaker than before the war began in February. BMI expects “depreciatory pressure on the rupiah to persist,” forcing Bank Indonesia to hike rates further.

Growth Target vs Reality  

High rates dampen growth, complicating President Prabowo Subianto’s goal of 8% GDP growth by 2029. Deputy Finance Minister Juda Agung told AFP the government would not abandon the target despite high social spending.

"We have to grow higher to become a rich country by 2045. Otherwise we are going to be trapped in the middle-income countries group,” he said. Juda, a former central bank deputy governor, backed the rate hikes, saying “the central bank is independent. They know what they should do.”

But Capital Economics said rate hikes alone won’t save the rupiah. “Placing the currency on a firmer footing requires the Prabowo administration to shift away from its populist and interventionist policy agenda… toward more investor-friendly policymaking.”

Rebuilding Trust  

Juda insisted the rupiah is undervalued and pressures are “manageable,” easing once the war ends. “Our economy is quite resilient,” he said.

Still, economists expect more rate hikes, threatening the government’s legal budget deficit cap of 3% of GDP. Jakarta also awaits an MSCI decision on market risk status after concerns over stock ownership transparency. A downgrade could trigger more capital flight.

The World Bank forecast 2026 growth at no more than 5.0% under high public spending strain — below the government’s 5.4% target. Official Q1 2026 growth was 5.6%, but analysts doubt the data’s reliability.

“Trust is earned by performance, by reputation, by action, not just with words,” said Deni Friawan of Jakarta’s Centre for Strategic and International Studies, urging spending cuts to prove fiscal discipline.

END/WD/RH