Hanoi (VMA) – Indonesia is facing mounting economic challenges as rising energy prices, a weakening IDR and concerns over government policies weigh on investor confidence, prompting analysts to call for stronger fiscal discipline and more market-friendly reforms to stem capital outflows.
As a net oil importer, Indonesia has been particularly vulnerable to rising global crude oil prices driven by tensions in the Middle East. The IDR has come under sustained pressure. Since early this year, the country’s stock market has lost around one-third of its value, making it one of the world’s worst-performing markets as investors rushed to sell assets.
Markets found temporary relief last week after Bank Indonesia (BI) raised its benchmark interest rate by a total of 0.75 percentage points in two consecutive moves. However, analysts at BMI, a unit of Fitch Solutions, noted that the IDR remains more than 7% weaker than it was in February and warned that continued depreciation pressures could force the central bank to tighten policy further.
Indonesian President Prabowo Subianto has faced criticism for maintaining costly populist programmes, including fuel subsidies and a multi-billion-USD school meal scheme.
Higher interest rates pose a direct challenge to Prabowo’s goal of achieving 8% economic growth by 2029. The World Bank last week projected that Indonesia’s growth is unlikely to exceed 5%, citing fiscal pressures.
Further challenges may lie ahead as MSCI considers downgrading Indonesia’s market risk rating over concerns about shareholder ownership transparency. Such a move could trigger another wave of capital outflows.
According to Capital Economics, Indonesia needs to move away from excessive interventionist policies and foster a more investor-friendly environment to attract foreign capital.
Economist Deni Friawan from Centre for Strategic and International Studies, Jakarta (CSIS) said the government should curb spending to contain the budget deficit. Restoring investor confidence, he said, will require tangible results and effective policy action rather than rhetoric alone./.
