- Indonesia and EM face oil shock, tariff uncertainty, and capital flight to AI-leading economies.
- Bonds, IDR, and equities have sold off as domestic policy slippages unsettled markets.
- Concerns on institutional independence and policy efficacy have deepened.
- Energy subsidies to exceed 3% of GDP; school lunch and infrastructure spending compound the strain.
- Fiscal clarity, credible rules, and stronger buffers are needed as persistent external shocks loom.
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COMMENTARY: Indonesia’s Fragility
These are difficult times for emerging market economies, with exogenous shocks galore. From the Iran-war led energy price spike to lingering tariff uncertainty, continued great power rivalry to El Niño, the list is long. Add on top of this a mega pivot of portfolio capital to industrial economy AI-buildout, as well as rising interest rates, outflows from EM are hardly surprising. The IIF estimates that during January-August, net capital flows to EM amounted to a strikingly negative USD347bn. This drawdown is comparable to the 2020 pandemic period.
The prescription to deal with increasingly frequent shocks is clear. Policymakers must take advantage of the good times by building fiscal, financial, and institutional buffers, and by establishing a deft and nimble policy reaction toolkit. When the inevitable time comes, the ability to absorb shocks is what differentiates the market that holds on and the one that sells off.
Indonesia, unfortunately, has been in the latter camp, with its bonds, currency, and equities selling off heavily year-to-date. While considering the impact of various external shocks, investors have also been concerned about a wide range of domestic slippages. The concerns range from public sector overreach on the private sector to the seeming erosion of independence of a wide range of public institutions. Governance related concerns have been compounded by policy volatility. Index inclusion reviews have dented investor confidence. These factors are reflected in lacklustre FDI and portfolio figures.
Cost of living and climate related angst are not specific to Indonesia, neither are complaints about un- and under-employment. But these are being accentuated by an increasingly precarious fiscal position.
Between energy subsidies (likely to exceed 3% of GDP this year, more than double of budget allocation), school lunch program (1% of GDP), and ballooning infrastructure and other spending programs, the fiscal deficit is understood to have gone well past the 3% of GDP fiscal rule limit. Accounting for all arrears and cash payables would provide much-needed clarity on the fiscal position. A thoughtful and credible re-examination of the fiscal rules on deficit and debt limits would be helpful.
As a variety of external challenges are likely to persist, Indonesia’s imperative is to sort out domestic challenges expeditiously. The window is not wide; the time to act is now.
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Related insights
- DBS Stock Pulse: Sheng Siong – A slower 4Q26 ahead02 Nov 2026
- Market Pulse: Turbulence02 Nov 2026
- Research Library30 Oct 2026
Related insights
- DBS Stock Pulse: Sheng Siong – A slower 4Q26 ahead02 Nov 2026
- Market Pulse: Turbulence02 Nov 2026
- Research Library30 Oct 2026
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