Airlangga Hartato was all smiles on Feb. 19 as he signed his name to what he called a “win-win” deal. After four trips to Washington, seven formal negotiating rounds, and nine meetings with U.S. Trade Representative Jamieson Greer, Indonesia’s economy minister had finally secured a reduction in U.S. duties on Indonesian goods—from a punishing 32% to a more tolerable 19%.
The agreement, grandly titled Toward a New Golden Age for the U.S.–Indonesia Alliance, promised tariff exemptions for key exports like palm oil, coffee, cocoa, and rubber. In exchange, Jakarta pledged to scrap barriers on more than 99% of U.S. imports and commit to some $33 billion in purchases of American energy, aircraft, and agricultural products.
The very next day, the U.S. Supreme Court struck down Trump’s Liberation Day tariffs—including the original 32% levy that had forced Jakarta into the talks in the first place—as unconstitutional. (Trump has since followed up with two new trade probes on Indonesia, one on excess manufacturing and another on forced labor.)
The Supreme Court’s ruling was the most visible example of bad timing in what has been a punishing few months for Southeast Asia’s largest economy, and an early test of President Prabowo Subianto’s high hopes for his tenure.
Since January, Indonesia has absorbed shocks from multiple directions at once. A warning from global index provider MSCI that Jakarta’s opaque stock market could lose its coveted emerging-market status triggered an 8% drop in markets over two days. Moody’s and Fitch both cut their outlooks on Indonesia’s sovereign debt to negative—the first step toward a possible downgrade. Trump’s tariffs, if they return, could threaten Indonesia’s export industries. Then came the Iran war, whose disruptions to the Strait of Hormuz threaten Indonesia’s fuel supply.
“The economy is heading into a perfect storm,” says Siwage Dharma Negara, co-coordinator of the Indonesia Studies Program at the ISEAS–Yusof Ishak Institute in Singapore. “This is something we’ve never imagined before.”
So far, these back-to-back blows haven’t hurt Indonesia’s real economy. But higher commodity prices, a weaker rupiah, and a squeeze on government spending could hit affordability in a country where protests in response to rising fuel prices and the cost of living are already common. More broadly, analysts warn that Indonesia’s push to give the state a greater role in the economy could hit business confidence and investment, just at the moment when Indonesia needs capital to grow its manufacturing and mining sectors.
“We’re in an unusual period where Indonesia’s need for foreign capital is high, but its willingness to constrain itself in pursuit of that capital is low,” says Mattias Fibiger, an associate professor at Harvard Business School who covers the Southeast Asian country.
A “human capital” president
Prabowo Subianto took office in October 2024 with a bold target of 8% annual growth by 2029. He inherited a solid economy from his popular predecessor, Joko Widodo—better known as Jokowi—who had tried leveraging Indonesia’s abundant natural resources through a “downstreaming” drive: banning raw nickel ore exports and forcing investors to build smelters and refineries on Indonesian soil. That policy turned the country into a critical node in global battery and EV supply chains.
Prabowo has sought to expand the state’s role further still. “If you can think of Jokowi as a ‘physical capital’ president, then Prabowo is a ‘human capital’ president,” Fibiger explains.
Prabowo hoped to invest in expansive social programs, like a nationwide free nutritious-meals scheme—now budgeted at roughly 335 trillion rupiah ($20 billion) for 2026, almost 9% of the total state budget, targeting 82 million schoolchildren, infants, and pregnant women.
But it will take a long time for such programs to pay off, if they do at all. “Those dividends will be felt a generation down the line, not a year, not three years, not five years down the line,” Fibiger says.
Negara is blunter, noting these measures “are not really contributing to productivity growth.”
Fibiger traces Indonesia’s problems back to September, when Prabowo abruptly removed his widely respected finance minister, Sri Mulyani Indrawati, amid mounting protests over living costs and inequality. Sri Mulyani had served three presidents and was, in Fibiger’s words, “a personification of the Washington consensus,” or a champion of fiscal discipline and market-oriented reforms.
Her replacement, Purbaya Yudhi Sadewa, was more aggressive on spending, tapping some $12 billion of the country’s reserves to recapitalize state-owned banks and pledging to use more than half of the government’s “rainy day” fund by the end of 2025.
“Indonesia has been a victim of both bad timing and bad policy,” Fibiger says.
Ratings shock
Yet the first shock to the country came from a different source entirely. On Jan. 28, MSCI warned that it might downgrade Indonesia to a “frontier market,” citing a lack of transparency over company ownership. Indonesia’s markets have long featured companies with dominant controlling shareholders and limited public floats, allowing insiders to drastically move share prices.
The market rout eventually wiped out $120 billion in value and forced out not only the chief executive of the Indonesian Stock Exchange (IDX), Iman Rachman, but also the chair of the Financial Services Authority (OJK), Mahendra Siregar. Goldman Sachs downgraded Indonesian equities to “underweight” and estimated that a drop to frontier-market status could trigger another $7.8 billion in outflows. Some local brokers warned that, in aggregate, more than $60 billion of foreign holdings could eventually exit if Indonesia were reweighted toward existing frontier peers.
Jakarta moved quickly to try to head that off. OJK pledged to raise minimum free-float requirements to 15% and tighten disclosure of company owners. Danantara, Prabowo’s new sovereign wealth fund, was mobilized to buy equities; the investment ceiling for pension funds and insurers was raised from 8% to 20% of assets.
Pandu Sjahrir, Danantara’s chief investment officer, a coal tycoon turned venture capitalist before joining the fund, says the IDX has “improved significantly” since the MSCI’s warning.
“How do you find a good balance between being issuer-friendly and investor-friendly? You have to be in the middle,” he says. A new IDX management team is expected in the second half of the year, and Pandu says he is “encouraged” by the caliber of applicants.
But the market alarm proved to be only the first in a chain. Within weeks, both Moody’s and Fitch downgraded their outlooks on Indonesia’s sovereign debt to negative. Moody’s cited “reduced predictability and coherence in the policymaking process,” while Fitch pointed to “growing centralization of policymaking authority.” (While S&P hasn’t changed its outlook, it too is wary of increased spending, noting that interest payments likely surpassed 15% of government revenue last year.)
“The underlying concern is about imbalance between state revenue and the government’s spending plans,” says Negara. Indonesia’s 2025 budget deficit reached 2.92% of GDP—the widest in more than two decades, outside of the COVID-19 crisis—pushing the country uncomfortably close to the 3% cap it adopted after the Asian Financial Crisis as a hard-won symbol of post-crisis discipline.
~$1 trillion
Assets managed by Danantara, Indonesia’s new sovereign wealth fund
$120 billion
Market value lost by companies on Indonesia’s IDX stock market, Jan. 29-30, 2026
2.9%
Indonesia’s 2025 budget deficit as a share of GDP
Sources: Danantara; S&P Global; Government data
A U.S.-Israeli strike on Iran in February and March, which led to the closure of the Strait of Hormuz, makes things even more complicated for Indonesia’s budget. (In another example of poor timing, Prabowo had just joined Trump’s “Board of Peace” to considerable fanfare, only to pause membership talks after the U.S. struck Iran.) Indonesia pumps around 608,000 barrels of oil a day, but surging domestic demand has made it a net importer since 2003.
The price of petrol has long been a political pressure point in Indonesia, where successive governments have used generous subsidies to keep prices artificially low. Rising fuel prices tend to lead to mass protests—as they did in 1998, eventually helping to topple Indonesia’s then-dictator Suharto, and in 2022, when protesters looted Sri Mulyani’s house.
Jakarta has vowed to keep fuel affordable without imposing the lifestyle changes—shorter workweeks, warmer air-conditioner settings—that some of its Southeast Asian neighbors have rolled out, but has offered few specifics on how it will pay for that stance.
In a mid-March interview with Bloomberg, Prabowo suggested he might lift the budget-deficit cap to deal with the short-term emergency of the Iran war and surging fuel prices. Pandu characterized the government’s approach as only breaching the cap in “special cases.”
Unease on Danantara
Danantara, the sovereign wealth fund Prabowo launched in early 2025 with an estimated $1 trillion in state assets under its umbrella, sits at the center of investor unease about Indonesia.
The fund was designed with a mandate to optimize returns from Indonesia’s sprawling state-owned enterprises and recycle capital into projects that accelerate national development.
“We have this dual role: How can we optimize assets from state-owned enterprises to create more value, and at the same time create quality jobs?” CEO Rosan Roeslani explained to Fortune last year.
Yet in practice, Danantara has been pulled deeper into Indonesia’s economy. Earlier this year, Prabowo ordered it to anchor the creation of a state-owned textile champion, backed by as much as $6 billion in capital, to rescue an industry hammered by cheap Chinese imports and trade disruption. That’s led to worries about confused objectives and mission creep. Others, like Negara, see Danantara as evidence “that the current administration is trying to strengthen the role of the state,” which is worrying the private sector, particularly as the government intervenes in strategic sectors like retail, mining, and energy.
“The market is asking us to be the anchor of confidence,” Pandu says, noting Danantara’s active engagement with MSCI and the rating agencies. “We’re investing in the stock market every day through fund managers,” he adds, helping to rebuild trust in a market that urgently needs it.
“Indonesia grows like a metronome, whether the rest of the world is facing a financial crisis or during boom times.”
Mattias Fibiger, Associate Professor, Harvard Business School
At the same time, he acknowledges that Danantara cannot act like a purely commercial investor. “If I had to choose between a project that offered a 7% return and created 100,000 jobs, or one that offered a 10% return but created no jobs, I’d have to take the 100,000 jobs option,” he says. “I have to make some profit, but I also have to generate high-quality work.”
Rather than the market turbulence or the fiscal squeeze, Pandu says his deepest concern lies elsewhere entirely—with AI. “My biggest fear is being left behind in terms of global trends happening today, both in the U.S. and China. Those two countries are developing things that are rapidly changing the world order in terms of the haves and the have-nots,” he says.
The metronome economy
Prabowo, a former army general, has been characteristically punchy in his response to foreign investors’ jitters. “The markets are not understanding me,” he griped to Bloomberg, insisting that analysts had “got it wrong” and that domestic regulators had mishandled the MSCI warnings.
The hard data give him some cover. Indonesia’s economy grew 5.11% in 2025, its fastest pace in three years and above most analysts’ expectations, supported by robust household spending and investment.
Negara agrees there is still a solid floor beneath the current turbulence. Indonesia’s growth has long been anchored by domestic demand rather than exports; a young, increasingly urban population; and a large, expanding middle class. “If domestic consumption is still growing, it means that there’s still an opportunity for the economy to grow at 4% or 5% per year,” he argues.
“The consumer is still relatively strong and wealthy, and they’re here to spend, especially the middle, upper middle class,” says Pandu of Danantara. He thinks global investors are ignoring opportunities in everyday Indonesian consumption.
Indonesia has been remarkably consistent. “The astonishing thing about Indonesia is that it grows like a metronome,” Fibiger says. He points out that since the end of the Suharto era, Indonesia has posted roughly 5% growth year after year “when commodity prices are high, when commodity prices are low, when the rest of the world is facing a financial crisis, or during boom times.”
“It doesn’t seem obvious to me that today’s problems will prevent Indonesia from growing around that number in the future,” he adds, even if Prabowo’s dream of 8% looks possible only with reforms.
Beyond consumption, Indonesia also offers opportunities in mining and metals, an increasingly hot sector as the world realizes the importance of critical minerals for industries like EVs and semiconductors. And then there’s AI and data centers, which can take advantage of Indonesia’s cheap and abundant energy supply, particularly as the country continues to invest in renewable energy.
“This is a great opportunity to tell Indonesia’s story,” Pandu says. “We haven’t done a great job at it, to be honest.”
This article appears in the April/May 2026: Asia issue of Fortune with the headline “Indonesia’s market meltdown.”
