Bank Indonesia turmoil intensifies rupiah decline amid policy uncertainty

Tokyo — Investors who expected President Prabowo Subianto to learn from Indonesia’s past economic missteps are likely to remain disappointed.

Since Prabowo took office in October 2024, he has pursued policies reminiscent of Indonesia’s earlier economic era, stirring debate over which model he truly embraces. What is clear, however, is that his administration is overseeing the country’s most severe financial turbulence since the 1997‑98 Asian crisis, with the rupiah losing more than 8% of its value year‑to‑date.

The outlook is deteriorating further as Persian Gulf tensions rise, the U.S. Federal Reserve signals additional rate hikes, and new U.S. tariffs arrive at a precarious moment. Each of these pressures intensified on Monday after Bank Indonesia Governor Perry Warjiyo abruptly resigned, removing a key link between Prabowo’s administration and the policies of his predecessor, Joko Widodo.

Warjiyo served as the final major bridge between Prabowo’s era and Widodo’s governing style. From 2014 to 2024, Widodo advanced Indonesia’s trajectory away from the kleptocratic legacy of Suharto—whose 32‑year rule ended with mass protests and his ouster during the 1997‑98 crisis. While Widodo did not revolutionize the country, he built on reforms initiated under Susilo Bambang Yudhoyono’s 2004‑2014 presidency, launching infrastructure projects designed to boost productivity and attract foreign investment. He also secured investment‑grade credit status for Jakarta.

Widodo also achieved unprecedented progress in reducing extreme poverty across Indonesia’s 280 million population and guided the nation through the COVID‑19 pandemic more effectively than many peers, including the United States—efforts that were supported by Warjiyo, whom he appointed as Bank Indonesia governor in 2018.

Prabowo, once Suharto’s son‑in‑law, has pledged to raise annual growth to 8% by 2029—a pace unseen since before the 1997 crisis—and launched a substantial fiscal stimulus package. This spending surge widened both the budget and current‑account deficits, bringing Prabowo into conflict with the globally respected Finance Minister Sri Mulyani Indrawati, whose cautious stewardship had acted as a check on his more aggressive impulses. Prabowo dismissed her in September 2025, sending shockwaves through global markets.

Prabowo compounded concerns by appointing his nephew, Thomas Djiwandono, as deputy governor of Bank Indonesia. Given this family connection and the broader pattern of policy shifts, many investors doubt that Warjiyo’s departure was purely “personal.”

“The leadership change adds uncertainty over the future direction of monetary policy, leaving the rupiah vulnerable to further weakness and heightened volatility,” comments 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 notes that Warjiyo’s exit “raises questions about the sufficiency of the broader macro stabilization efforts.”

Markets are hoping that interim BI chief Destry Damayanti, a senior deputy governor, can restore calm. However, Mitra warns that until monetary uncertainty resolves—or fiscal announcements deliver positive surprises—risk premia on the rupiah will stay elevated, leaving any transitional leadership to navigate “stark tradeoffs between managing growth and rupiah stability.”

ANZ Bank’s Asia research head, Khoon Goh, says markets will now focus on Warjiyo’s permanent successor. “This could take a few months, and in the interim, while there is some continuity with the deputy governor taking over, we are also entering a potentially choppy period as well.” The timing is particularly painful because recent stabilization—bolstered by S&P’s affirmation of Indonesia’s rating outlook—had just begun to calm investor nerves. “So,” Goh adds, “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 will be difficult “especially now that monetary policies are under executive control.”

Compounding domestic challenges are external shocks. Trump’s war with Iran has driven oil prices and risk premia higher, hitting the rupiah hard. Additionally, a fresh U.S. tariff barrage—10‑12.5% on Indonesia and other regional peers—arrives at the worst possible moment. 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 remains cloudy. Whether Prabowo intends to revive elements of the old Suharto system is unclear, but his rapid sidelining of Widodo’s allies—key figures who helped elect him—has deepened investor unease. Early optimism that Prabowo would stay on the reform path has faded, replaced by concerns over Indonesia’s fiscal trajectory, rising economic nationalism, possible democratic backsliding, and eroding central bank autonomy—all of which are driving capital out of rupiah‑denominated assets.

Against this backdrop, Bank Indonesia is left treating symptoms rather than causes. Monetary tightening may slow the rupiah’s slide, but it cannot offset the policy uncertainty driving investors away.

A resurgent dollar adds to the pressure. As the Federal Reserve pivots toward hikes, all of Asia feels the strain, but Indonesia’s self‑inflicted wounds make it stand out. Export‑led, dollar‑dependent Asian economies are on the front lines of any U.S. credit‑market contagion, and dollar strength reignites the specter of 1997‑98.

One side effect of the U.S.‑ and Israeli‑led conflict with Iran is the dollar’s “wrecking‑ball” behavior, which is back in force. Despite a U.S. national debt nearing $39 trillion, elevated inflation, and Trump’s tariffs, the dollar continues to rise—an obvious threat to Asia in 2026.

Extreme dollar strength has a poor track record in the region. The Asian financial crisis was rooted in the Fed’s 1994‑95 tightening cycle, when short‑term rates doubled in 12 months, causing a surge that broke Asian currency pegs—Thailand devalued first in July 1997, followed by Indonesia and South Korea. The 2013 “taper tantrum” produced another 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, siphoning capital needed elsewhere to finance deficits, stabilize bond yields, and support equities. Trump, who has long sought to weaken the dollar and even worked to strip the Fed of its policy independence, finds Asia’s currencies slipping nonetheless.

AI‑related volatility compounds the vulnerability. Moody’s Analytics notes that the Middle East conflict has sent shockwaves through Asian equity markets, hitting South Korea hardest after an AI‑driven rally had already pushed valuations in Korea and Taiwan to stretched levels. The result, Moody’s argues, is that 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 are fleeing Indonesia, driving Jakarta equities to multi‑year lows. They cite Prabowo’s fiscal maneuvers, export controls, and pressure on Bank Indonesia as reasons to sell. The deeper problem may be a lack of self‑awareness within Prabowo’s economic team; its policy mix has become so erratic that index provider MSCI is weighing a downgrade of Indonesia to frontier‑market status, a threat that has loomed over the rupiah for months.

Prabowo’s allies point out that efforts to curb central bank independence are not unique to Jakarta—Washington has taken similar steps, with Trump nominating adviser Stephen Miran to the Fed board and installing loyalist Kevin Warsh as Fed chair.

However, Indonesia’s push to weaken its financial guardrails explains not only why the rupiah is sliding but why its declines could become even more dramatic in the second half of 2026.

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