Stock Market Plunge Signals Fading Indonesian Economy

Trading halted as officials seek to regain control

By: Ainur Rohmah

Plagued by steeply climbing state debt and spooked by erratic economic policies pushed by President Prabowo Subianto, the Jakarta Composite Index plummeted so sharply on March 18 that officials halted trading for 30 minutes, the market’s worst performance since the onset of the Covid-19 pandemic.

Analysts say the steep correction isn’t solely due to external factors but is also driven by a combination of domestic issues that have eroded investor confidence. The capital market crisis, they say, serves as a loud alarm for the nation’s economic stability. A series of government politics and economics politics, implemented without adequate risk mitigation, are undermining market trust and accelerating foreign capital outflows, with analysts urging the government to take immediate recovery measures to prevent a deeper collapse.

Prabowo has advocated an expensive series of programs including a universal school lunch program whose costs are projected to reach Rp420 trillion (US$25.90 billion), more than 10 percent of the entire US$226 billion equivalent fiscal budget by the end of the year, a US$60 billion seawall to protect Jakarta from sinking, continuing downstreaming of resource-based industries and other programs. Former President Joko Widodo’s stalled Kalimantan government capital remains an expensive issue.

Estimates from 2023 suggest that Indonesia's six biggest construction SOEs collectively faced debt over Rp1,000 trillion (US$62.8 billion), an average of US$11.3 billion per company, which is likely to severely limit their ability to invest in new projects and technology.

According to data from the Indonesia Stock Exchange (IDX), the IHSG dropped by 395.8 points, or 5.02 percent, to 6,146.91 by the close of yesterday’s first trading session. That occurred while stock markets in most other Asian countries were in positive territory. Data from the IDX revealed that trading volume reached Rp8.39 trillion, with 13.57 billion shares traded. Massive selloffs dominated the market, occurring 753,000 times. According to the Financial Services Authority (OJK), the IHSG has fallen by 13 percent year-to-date in 2025.

Bhima Yudhistira, executive director of the Center of Economic and Law Studies, stated that Indonesia’s capital market is now in the “yellow light” category. “The IHSG is the weakest in Asia. This is an anomaly, as most Asian stock indices are moving positively,” Bhima said. He argued that the sharp correction in Indonesia’s stock market is not merely due to external factors but is also fueled by a combination of domestic issues that have worsened investor sentiment.

“Deteriorating fiscal performance, the controversy over the revision of the Military Law (UU TNI), skepticism about Danantara, and weakening consumer purchasing power are the main factors,” Bhima said. Modeled after Singapore's Temasek, Danantara, the new sovereign investment fund proposed by Prabowo, seeks to enhance the performance and returns of state investments, aiming to position Indonesia as a global economic powerhouse.

However, as Asia Sentinel reported on March 3, Danantara’s creation has raised concerns about potential political interference and governance issues, given its close ties to Prabowo. Bhima also said Prabowo’s plan to revise the Military Law in collaboration with the House of Representatives (DPR) as Asia Sentinel reported on February 18, has also raised concerns among investors, contributing to market pressure.

“There is a risk of military personnel taking on civilian roles, which could reduce Indonesia’s economic competitiveness, increase conflicts of interest, and open the door to corruption,” Bhima said. The military drove the country into stagnation and corruption during the 31 years of the reign of the strongman Suharto, who was driven from power in 1998.

This political uncertainty has further dampened investor sentiment, compounded by the protectionist policies of the United States under President Donald Trump, which have also disrupted emerging markets. However, Bhima emphasized that domestic factors are more dominant in the pressure on Indonesia’s capital market. “If a trading halt occurs, it’s a signal that foreign investors will continue their sell-off,” he warned.

Bhima cautioned that if the trend of capital outflows persists, it could indicate that Indonesia is heading toward an economic recession. “If a recession occurs, mass layoffs and social conflicts could erupt across various regions,” he said. To calm market turbulence, Bhima suggested that the government consider canceling the military law revision, which he believes could restore investor confidence in the short term.

In line with Bhima’s concerns, Hendra Wardana, an analyst and founder of Stocknow.id, noted that foreign investors have recorded a massive net sell-off of Rp26.04 trillion (US$1.57 billion) in 2025, including Rp1.77 trillion in the past week alone. “This indicates that foreign investors’ confidence in the Indonesian market is declining,” Hendra said.

Additionally, the state budget deficit as of February 2025 reached Rp31.2 trillion, with debt interest repayments totaling Rp79.3 trillion in the first two months. The rising debt burden could hinder productive government spending, preventing the economy from receiving optimal stimulus.

The real sector is also under significant pressure, as evidenced by widespread layoffs and an increase in non-performing loans (NPLs), which rose to 2.17 percent in January 2025 from 1.9 percent in 2024. This indicates weakening consumer purchasing power and rising banking risks. Meanwhile, the continued depreciation of the rupiah has added pressure on companies with US dollar-denominated debt exposure.

Hendra added that the IHSG is also under pressure due to selloffs in large-cap stocks that support the index. “The combination of weakening banking and conglomerate stocks, which have the largest weight in the index, has caused the IHSG to lose resilience amid negative sentiment,” he said.

However, Hendra noted that there is potential for recovery if key factors improve, such as the stability of government economic policies, clarity on global interest rate trends, and the return of foreign funds to the Indonesian stock market. “But for now, the market is still in an adjustment phase, waiting for further certainty regarding macroeconomic conditions,” he said.

Externally, Hendra pointed out that uncertainty over the US Federal Reserve’s interest rate policy is a major factor influencing market sentiment. If US inflation remains high, interest rate cuts could be delayed, making potentially risky assets like stocks less attractive. Additionally, over the past three weeks, the US stock market has lost US$5.28 trillion in value, adding pressure to Asian markets, including Indonesia. “Global investors are being more cautious in allocating funds, which has also hindered capital flows to emerging markets like Indonesia,” he said.

The IHSG’s plunge of more than 6 percent indicates that Indonesia’s economy is not in good shape, Hendra said. Foreign investors are losing confidence due to a combination of global and domestic factors. However, the stock market is cyclical. “If economic policies become more stable and investors see more attractive profit prospects, it’s not impossible for foreign funds to return to Indonesia, bringing the IHSG back on a recovery path,” he said.

A survey by the Institute for Economic and Social Research (LPEM) at the University of Indonesia’s Faculty of Economics and Business (FEB) found that the majority of experts surveyed – 23 out of 42, or 55 percent – agreed that economic conditions have worsened compared to three months ago.

“Seven experts even consider the situation much worse, while 11 see it as stagnant, and only one expert views it as better. With an average confidence interval of 7.71 points, this survey reflects the generally pessimistic outlook of economic experts on Indonesia’s economic conditions,” LPEM UI wrote in its report titled Economic Experts Survey, released on Monday, March 17, 2025.

Inarno Djajadi, the Chief Executive of Capital Market, Financial Derivatives, and Carbon Exchange Supervision at OJK, stated that the authority will address stock market volatility by relaxing regulations for publicly listed companies, allowing them to conduct share buybacks without needing approval from a general meeting of shareholders (GMS), as outlined in POJK No. 13/2023.

“We hope that this buyback policy, which does not require GMS approval, will send a positive signal about the companies' strong fundamentals, increase investor confidence, and give publicly listed companies the flexibility to take actions that can help ease stock price pressures,” he said.