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Indonesia’s rupiah fell to its weakest level against the US dollar since the Asian financial crisis of 1998 over mounting fears about the policies of President Prabowo Subianto and their impact on the fiscal position of south-east Asia’s largest economy.
The rupiah fell as much as 0.5 per cent to briefly hit 16,640 against the dollar on Tuesday, not far from its record low of 16,800 in June 1998, the year of the downfall of Suharto, Indonesia’s former longtime dictator.
Bank Indonesia, the country’s central bank, told the Financial Times that it had intervened in bond and currency markets on Tuesday “to ensure the stability of the rupiah exchange rate and maintain the balance of foreign exchange demand and supply, thereby maintaining market confidence”.
The bank added that recent moves in the rupiah “are primarily driven by global factors that remain highly uncertain . . . These include Trump’s tariff policies and their impact on other countries, the Fed’s potentially more hawkish policy and ongoing geopolitical tensions.”
Even though the central bank blamed external factors, investors have primarily been spooked by the greater fiscal largesse by former army general Prabowo. His flagship programme to provide free lunches to schoolchildren and pregnant mothers has cost an estimated $28bn a year and put a huge strain on government finances. Indonesia posted an unexpected budget deficit for the first two months of the year.
Signs of an economic slowdown have also damped investor interest. A sluggish economy could force the central bank to cut interest rates, adding further pressure on the currency, say analysts.
“The big picture is that of a fiscally less responsible government,” said Viktor Szabo, a fund manager at Aberdeen Investments.
The rupiah has been the worst-performing currency among Asia’s biggest economies this year, down almost 3 per cent against the dollar. The benchmark Jakarta stock index has also shed about 14 per cent in dollar terms since the start of 2025.
Indonesia was one of the biggest casualties of a currency crisis that began with the Thai baht in 1997 before it spread across Asia and forced Indonesia and other countries into IMF bailouts. Economic misery then inflamed street protests that helped bring down the Suharto regime.
The crisis was a defining moment for a generation of Asian monetary policymakers who, ever since, have built up foreign exchange reserves and readily intervened in markets to ensure a repeat could never happen.
Indonesia has eaten into its own roughly $154bn reserves pile by about $1.5bn to fund interventions in the first two months of this year, according to central bank data. It has been regularly intervening in the spot, non-deliverable forwards and bond markets to support the currency.
“We look for relative rupiah underperformance to extend into the second quarter despite a likely softer dollar outlook in the short term,” Barclays analysts said in a research report on Tuesday, citing fiscal pressures and negative foreign investor sentiment towards Indonesian assets.
Indonesian companies, meanwhile, are bearing the brunt of competition from cheap Chinese goods diverted to emerging markets. This flow could increase if the US adds to tariffs on China. Sritex, one of the country’s biggest garment companies, closed operations last month.
Observers are now focused on the governance of a new sovereign wealth fund.
The Danantara fund named billionaire investor Ray Dalio and former Thai prime minister Thaksin Shinawatra among its foreign advisers this week, but investors are cautious about political influence on a portfolio that will include several state-owned companies.
“We think that there is still uncertainty on the execution and operation of the fund, which could keep markets volatile given the government’s aggressive spending plans,” said JPMorgan analysts.
Additional reporting by Ian Smith in London
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