Investors hoping that President Prabowo Subianto would steer clear of Indonesia's past economic missteps are facing a harsh reality. Since taking office in October 2024, the former general has presided over the worst financial turbulence the country has seen since the 1997-98 Asian crisis. The rupiah has tumbled more than 8% against the dollar this year, and the outlook is worsening.
The latest blow came with the abrupt resignation of Bank Indonesia (BI) Governor Perry Warjiyo, who had served since 2018 under predecessor Joko Widodo. Warjiyo was widely seen as a pillar of continuity between the Widodo era and the new administration. His departure, officially attributed to personal reasons, has been met with deep skepticism by analysts and investors.
“The leadership change adds uncertainty over the future direction of monetary policy, leaving the rupiah vulnerable to further weakness and heightened volatility,” said Adam Ahmad Samdin of Oxford Economics. “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.”
Fiscal expansion meets monetary uncertainty
Prabowo has pledged to lift annual growth to 8% by 2029, a pace not seen since just before the 1997 crisis. To achieve that, he launched a heavy fiscal stimulus push that widened both the budget and current-account deficits. That spending spree put him on a collision course with Finance Minister Sri Mulyani Indrawati, a globally respected technocrat who had acted as a check on his impulses. He sacked her in September 2025, rattling global markets.
He then doubled down by appointing his nephew, Thomas Djiwandono, as deputy BI governor. That pattern of political appointments has deepened concerns about eroding central bank independence.
“The leadership change adds uncertainty over the future direction of monetary policy, leaving the rupiah vulnerable to further weakness and heightened volatility,” said Adam Ahmad Samdin of Oxford Economics. “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.”
External shocks compound domestic woes
Layer on top of that home-grown mess a set of external shocks. The US-led military campaign in Iran has sent oil prices and risk premia higher, hitting the rupiah hard. US President Donald 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, and Indonesia is now the most exposed.
