Indonesia’s financial markets were jolted Monday (June 8) as the rupiah hit a new record low of over 18,155 to the US dollar and the main stock index fell 4%. Investors are rapidly dumping their rupiah-denominated assets, with foreigners selling US$422 million of local bonds and $3.6 billion in local stocks so far this year.
What makes the current moment particularly precarious is that government policies designed to stabilize the currency are themselves squeezing the crucial industrial sector they are meant in part to protect.
Higher interest rates and aggressive issuance of risk-free government securities are drawing capital away from productive lending, hitting manufacturers with a simultaneous currency shock and credit crunch.
The twin hit is raising the risk of premature deindustrialization — a condition in which manufacturing’s share of the economy collapses not because Indonesia has grown richer and moved up the value chain, but because the external and policy environments are making domestic production increasingly unprofitable.
Manufacturing already accounts for barely 19% of GDP, down from around 30% before the 1997–98 Asian financial crisis, and analysts warn the sector may now be approaching a tipping point.
Pressure on the rupiah, ignited by pressures from the Iran war, has been compounded by seasonal dividend repatriations by multinational corporations and private-sector foreign debt repayments due in the second quarter.
At the same time, foreign exchange earnings from the real sector have weakened as Indonesia’s trade surplus shrank dramatically to just $89.1 million in April, largely because of soaring energy import costs and declining competitiveness.
Faulty figures, false confidence
Government officials and monetary authorities continue to insist that Indonesia’s economic fundamentals remain sound. Their confident messaging is anchored in first-quarter economic growth of 5.6%, a steady budget deficit of 2.48% of GDP and private external debt at a manageable 29.5% of GDP.
Yet the gap between reassuring macroeconomic indicators and the realities of Indonesia’s underlying economic structure is widening – reflected most clearly in the rupiah’s declining fortunes.
Rewind to 1997, just before the Asian financial crisis, the rupiah traded near 2,300 to the dollar. When the crisis hit, it quickly collapsed to over 10,000.
After decades of relative stability and moderate drift, the currency started to falter again in late 2024, when it breached the 16,000 mark, and fell further below 17,000 in March this year with the outbreak of the Iran war.
Investors are clearly concerned about Indonesia’s inefficient domestic markets, undermined by oligopolistic practices and an industrial sector highly dependent on increasingly expensive imported inputs.
Market skepticism has been reinforced by domestic policy coordination that many view as counterproductive for real-sector liquidity. To defend the rupiah, Bank Indonesia raised its benchmark interest rate to 5.25% in May and aggressively expanded the issuance of Bank Indonesia Rupiah Securities (SRBI).
With outstanding SRBI holdings exceeding 915 trillion rupiah and offering risk-free yields above 7%, the instrument has attracted foreign capital and supported foreign exchange reserves. However, this monetary strategy has also produced an unwanted crowding-out effect, draining liquidity from the domestic banking system.
Premature deindustrialization
Indonesian banks increasingly prefer to place funds in SRBI and government bonds rather than extend credit to the productive economy. Household savings have also flowed into government debt instruments that offer significantly higher returns than conventional bank deposits.
The result is a rapid tightening of rupiah liquidity across the financial system. For manufacturers, the policy environment creates a double burden: borrowing costs are rising while access to new credit is shrinking as liquidity is diverted toward risk-free government instruments.
Fiscal policy faces its own constraints. The launch of large-scale social programs, including the Free Nutritious Meals initiative, has significantly increased government spending. The program currently requires 71 trillion rupiah in funding and is forecast by some to expand to 171 trillion rupiah.
At the same time, the government faces approximately 800 trillion rupiah in maturing debt obligations in 2025–26. To finance these commitments and roll over existing debt, Jakarta has been issuing government bonds aggressively.
This fiscal expansion, occurring alongside monetary tightening, has further squeezed liquidity in financial markets and kept yields on 10-year government bonds elevated. Higher sovereign yields translate directly into more expensive financing for private corporations, including manufacturers.
The combination of tighter monetary policy and expansionary fiscal policy has left Indonesia’s industrial sector increasingly vulnerable. Manufacturing remains the backbone of the national economy, contributing 19.1% of GDP in the first quarter of 2026 and employing millions of formal-sector workers alongside agriculture and trade.
But the sector’s long-term decline, from roughly 30% before the 1997–98 crisis to below 20% today, is widely seen as premature deindustrialization. And it is now confronting a severe currency shock without adequate government policy support.
The greatest structural weakness in Indonesia’s manufacturing base is its dependence on imported raw materials and foreign-currency financing. Business surveys indicate that around 70% of industrial inputs still originate overseas because domestic upstream industries remain underdeveloped.
Raw materials account for approximately 55% of total production costs, making manufacturers exceptionally vulnerable to exchange-rate fluctuations. When the rupiah breaches 18,000 per dollar, the resulting increases in input costs move almost immediately through industrial supply chains.
Broken cost structure
Industries with high import dependence — including petrochemicals, plastics, pharmaceuticals, food processing, beverages, and textiles — face immediate cost shocks that disrupt cash flow planning and profitability. Rising prices for imported naphtha, for example, quickly drive up domestic plastic resin prices, creating ripple effects across packaging and related industries.
The rise in the S&P Global Manufacturing Purchasing Managers’ Index to 50.0 in May should therefore be interpreted with caution. Rather than signaling a genuine recovery in demand, the improvement may largely reflect precautionary stockpiling by manufacturers rushing to secure imported raw materials before costs climb even higher.
Cost pressures are further intensified by private-sector foreign debt, much of which remains denominated in US dollars. Although Bank Indonesia reports that private external debt eased slightly to $191.4 billion in the first quarter of 2026, the rupiah value of those liabilities has surged because of currency depreciation.
For companies that lack adequate hedging strategies, higher debt-servicing costs weaken balance sheets, increase credit risk and raise the probability of default on commercial debt and sukuk issuances, an Islamic alternative to interest-earning conventional bonds.
At the same time, manufacturers have limited ability to pass rising costs on to consumers. Purchasing power, particularly among middle-class households that drive domestic consumption, is already under heavy pressure from food inflation and higher imported energy costs.
Significant price increases would likely sharply reduce sales volumes. As a result, many firms are forced to absorb much of the cost increase themselves, sacrificing profit margins to levels analysts say are increasingly unsustainable.
To survive, manufacturers are likely to adopt highly defensive strategies. The most immediate response will be freezing expansion plans and postponing capital expenditures. Medium- and long-term investments with uncertain returns, especially those dependent on imported machinery and equipment, are likely to be shelved.
The consequence will be fewer new factories and slower creation of formal-sector jobs.
Macroeconomic crisis risks
Mass layoffs could be next. Labor-intensive sectors, particularly textiles and garment manufacturing and plastics production, are especially vulnerable.
More than 13,800 workers in Indonesia’s textile and apparel industry reportedly lost their jobs between early 2024 and mid-2026. The trend appears set to accelerate, with labor unions reporting emergency workforce reduction plans at several major manufacturing companies across West Java and Banten.
If operating costs continue to rise without meaningful policy intervention, multinational corporations may begin relocating production to other countries. Should such defensive decisions become widespread, the broader economy would face significant spillover effects as employment losses accelerate the shift toward lower-productivity informal work, reduce tax revenues and weaken overall national competitiveness.
Declining incomes among formal-sector workers would, in turn, hit household consumption, which accounts for more than 54% of Indonesia’s GDP. That, in turn, would create a self-reinforcing cycle of economic weakness, potentially dragging growth below official targets.
Meanwhile, deteriorating corporate finances would likely increase non-performing loans across the banking system. Banks already constrained by the crowding-out effects of SRBI would be forced to allocate even larger provisions against potential losses, creating the risk of a broader credit crunch affecting businesses across the economy.
Preventing deeper industrial decline and wider financial crisis will require extraordinary policy coordination among Indonesia’s Ministry of Finance, Bank Indonesia and the Ministry of Industry.
Fiscal measures could include income-tax relief for workers in labor-intensive industries, accelerated export-tax refunds to strengthen corporate cash flows and more flexible import regulations for critical industrial inputs.
Bank Indonesia could consider expanding the use of Local Currency Transaction (LCT) arrangements, which had reached $22.7 billion by April, to reduce dollar dependence. Only through bold, synchronized and targeted policy intervention can Indonesia shield itself from the rising risk of accelerated and terminal deindustrialization.
Ronny P. Sasmita, Ph.D., is a senior analyst at the Indonesia Strategic and Economic Action Institution, a Jakarta-based think tank.
