Indonesia’s Rupiah Slumps as Political and Fiscal Fears Rattle Markets

Picture Credit: Free Malaysia Today

Indonesia’s rupiah slid to a record low against the US dollar this week, underscoring growing investor unease over fiscal discipline and the independence of the country’s central bank. The currency touched an intraday low of 16,985 per dollar, extending a decline that has already made it one of Asia’s weakest performers this year.

While global factors usually drive rupiah volatility, domestic pressures have played a larger role recently. Concerns intensified after Indonesia posted a 2025 budget deficit of 2.92% of GDP (its widest outside the pandemic era) raising questions about the country's fiscal sustainability. Those worries have been compounded by capital outflows from the bond market, with 10 year yields climbing to their highest level in months.

Market confidence has also been shaken by political developments surrounding Bank Indonesia. President Prabowo Subianto’s decision to nominate his nephew for a senior central bank role has reignited debate over institutional independence. This follows earlier controversy over a “burden sharing” arrangement in which the central bank agreed to support government programmes, a move critics say risks blurring policy boundaries.

Short term pressures are adding to the strain. Seasonal demand for dollars ahead of Ramadan, combined with dividend repatriation and import payments, has boosted demand for foreign currency. Although Bank Indonesia has cut interest rates aggressively since 2024 to support growth, it is now expected to pause easing interest rates to prevent further depreciation.

For now, the economic impact remains contained. Inflation has stayed within the central bank’s target range, but prolonged weakness could raise costs for import dependent industries and inflate fuel subsidies and external debt payments. With sizeable foreign exchange reserves and ongoing market intervention, policymakers remain confident but the rupiah’s trajectory will hinge on restoring trust in Indonesia’s fiscal path and policy credibility.