TOKYO — Investors hoping President Prabowo Subianto might learn from Indonesia’s past economic mistakes should get used to disappointment.
Since taking office in October 2024, Prabowo has worked to drag Southeast Asia’s biggest economy back into its past. Which past is debatable. What isn’t debatable: the general-turned-politician is overseeing Indonesia’s worst financial turmoil since the 1997-98 Asian crisis. The rupiah is down more than 8% year to date.
Things are about to get worse. Tensions are re-escalating in the Persian Gulf. The Federal Reserve is signaling more rate hikes. And US tariffs are landing at the worst possible moment. Each of those pressures got heavier Monday with the abrupt departure of Bank Indonesia (BI) Governor Perry Warjiyo.
Warjiyo was the last major link between the Prabowo era and the policies of predecessor Joko Widodo. From 2014 to 2024, Widodo moved Indonesia farther beyond the kleptocratic system Suharto built over his 32-year reign, which ended in mass protests and his ouster in 1998 during the Asian financial crisis.
Widodo didn’t revolutionize Indonesia, but he built on the reform groundwork laid during Susilo Bambang Yudhoyono’s 2004-2014 presidency, launching infrastructure projects meant to lift productivity and draw foreign investment. And showcasing Jakarta’s new status as an investment-grade credit.
Widodo also made unprecedented progress cutting extreme poverty in Indonesia’s 280 million-strong population, and steered the country through Covid-19 more smoothly than many peers — the US included. He did it with BI governor Warjiyo, his handpicked pick since 2018.
Enter Prabowo, once Suharto’s son-in-law. He’s pledged to lift annual growth to 8% by 2029 — a pace Indonesia hasn’t seen since the eve of the 1997 crisis — and opened with a heavy fiscal stimulus push.
That spending spree widened Indonesia’s twin budget and current-account deficits and put Prabowo on a collision course with globally respected Finance Minister Sri Mulyani Indrawati, who’d acted as a check on his impulses. He sacked her in September 2025, rattling global markets.
Prabowo doubled down by naming his nephew, Thomas Djiwandono, deputy BI governor. That track record is why few investors believed Warjiyo left for “personal” reasons.
“The leadership change adds uncertainty over the future direction of monetary policy, leaving the rupiah vulnerable to further weakness and heightened volatility,” says Oxford Economics’ Adam Ahmad Samdin. “We maintain our call for another Bank Indonesia rate hike in the third quarter. But delayed policy action, or a premature pivot, could ultimately necessitate a more aggressive tightening cycle down the line to restore confidence in the local currency.”
Once lost, central bank credibility is brutally hard to rebuild. BNY Investments strategist Aninda Mitra says Warjiyo’s exit “raises questions about the sufficiency of the broader macro stabilization efforts.”
Markets are hoping interim BI chief Destry Damayanti, a senior deputy governor, can restore calm. But Mitra warns that until the monetary uncertainty clears — or fiscal announcements surprise to the upside — rupiah risk premia will stay elevated, leaving any transitional leadership “more stark tradeoffs between managing growth and rupiah stability.”
ANZ Bank’s Asia research head, Khoon Goh, says markets will now fixate on Warjiyo’s permanent successor. “This could take a few months, and in the interim, whilst you can argue there is some continuity with the deputy governor taking over, we’re also entering a potentially choppy period as well.” The timing stings, Goh adds, because recent stabilization — helped by S&P affirming Indonesia’s rating outlook — had just started calming nerves. “So,” Goh says, “this latest development has once again introduced uncertainty for investors.”
Camelia Suryanata, head of research at Kiwoom Sekuritas, tells the Jakarta Post that rebuilding investor confidence won’t be easy “especially now that monetary policies are under executive control.”
Layer on top of that home-grown mess a set of external shocks. Trump’s war in Iran has sent oil prices and risk premia higher, hitting the rupiah hard. US President Trump’s latest tariff barrage — fresh US levies of 10-12.5% on Indonesia, India, the Philippines and others — could not have landed at a worse time. The immediate priority, says Moody’s Analytics economist Xiaohan Chen, is an “all-hands-on-deck approach to preserve rupiah stability.”
The longer-term picture is murkier. Whether Prabowo intends to revive elements of the old Suharto system remains unclear. But the speed with which he sidelined Widodo’s allies — the same allies who helped elect him — has only deepened investor unease. Early optimism that Prabowo would stay the reform course has faded, replaced by concern over Indonesia’s fiscal trajectory, rising economic nationalism, possible democratic backsliding, and eroding central bank autonomy — all of which is driving capital out of rupiah assets.
Against that backdrop, BI is left treating symptoms, not causes. Monetary tightening can slow the rupiah’s slide, but it can’t offset the policy uncertainty pushing investors toward the exits.
A resurgent dollar isn’t helping. All of Asia is exposed as the Federal Reserve pivots toward hikes, but Indonesia’s self-inflicted wounds make it stand out — no small feat in a region where governments often work against their own interests. Export-led, dollar-dependent Asian economies would sit on the front lines of any US credit-market contagion — and dollar strength is exactly why the ghosts of 1997-98 are stirring again.
One side effect of the US- and Israeli-led Iran war: the dollar’s wrecking-ball tendencies are back. Despite US national debt nearing $39 trillion, elevated inflation, and Trump’s tariffs, the dollar keeps rising against the odds — a clear and present danger for Asia in 2026.
Extreme dollar strength has a bad track record in this region. The Asian financial crisis had its roots in the Fed’s 1994-95 tightening cycle, when the Fed doubled short-term rates in 12 months. The resulting dollar surge broke Asia’s currency pegs — Thailand devalued first, in July 1997, then Indonesia, then South Korea. The 2013 “taper tantrum” was another such episode, prompting Morgan Stanley’s original “fragile five” list: Brazil, India, Indonesia, South Africa and Turkey.
Now a stubbornly strong dollar is complicating Asia’s plans anew, pulling in capital that’s needed elsewhere to finance deficits, stabilize bond yields and support equities. Trump isn’t exactly happy about all this. He’s spent years trying to weaken the dollar, including by working to strip the Fed of its policy independence — even as Asia’s top currencies slide against it.
AI-related jitters compound the vulnerability. Moody’s Analytics notes that the Middle East conflict has sent shockwaves through Asian equity markets, hitting South Korea hardest, after a red-hot AI rally had already pushed valuations in Korea and Taiwan to stretched levels. The result, Moody’s argues: markets “where AI optimism had recently raised valuations to stretched levels” are absorbing the heaviest macro and financial fallout, and while the initial shock may fade, “market volatility looks set to stay elevated.”
Investors fleeing Indonesia — driving Jakarta equities to multiyear lows — cite Prabowo’s fiscal maneuvers, export controls, and pressure on BI as reasons to sell. The deeper problem may be a lack of self-awareness inside Prabowo’s economic team. Its policy mix has grown so erratic that index giant MSCI is weighing a downgrade of Indonesia to frontier-market status, a threat that has shadowed the rupiah for months.
Prabowo’s allies note that efforts to rein in central bank independence aren’t unique to Jakarta — Washington included. Trump nominated adviser Stephen Miran to the Fed board and installed loyalist Kevin Warsh as Fed chair to replace Jerome Powell.
But Indonesia’s push to weaken its own financial guardrails explains not just why the rupiah is sliding but why its declines could become even more dramatic in the back half of 2026.
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