Indonesia is a timely case study in how two of our Mid-Year Outlook themes — Fragmentation and Inflation — are hitting one energy-sensitive emerging market at the same time. Because Indonesia imports a large share of its fuel and runs a sizable subsidy program, the supply shock of the US-Iran War flowed through quickly. Even as the conflict moves toward de-escalation and energy prices begin to stabilize, Indonesia's challenges run deeper than oil. These challenges include a ~$15bn free meal program facing execution and budget questions, an energy subsidy bill tracking near $29bn, the governance of the newly created sovereign wealth fund and an evolving licensing framework in strategic sectors such as mining and palm oil. Earlier this year, MSCI flagged concerns around investment transparency, while S&P, Fitch, and Moody's have revised their forward outlooks toward more cautious tones. Individually, each of these factors would be manageable. Collectively, they have led to Indonesian assets being among the worst-performing markets in the world year to date.
In response to falling asset prices and investor confidence the Bank Indonesia has now moved twice — a 50bp hike in May to 5.25%, followed by an unexpected off-cycle 25bp hike on June 9 to 5.50% — and our Investment Bank expects two further 25bp hikes, taking the policy rate to 6.00%, alongside a broader FX defense package. We remain selective near term, while seeing tactical opportunity as valuations reset and yields offer better income. For clients with meaningful IDR exposure, it may be a good time to revisit how that exposure is sized and hedged given the volatility ahead. Should Bank Indonesia deliver on FX stability and inflation control, and foreign sentiment recovers, Indonesian fixed income and credit screen as increasingly attractive.
As a net energy importer with a large subsidy program, Indonesia was one of the hardest hit countries by the US-Iran War: a higher energy import bill added pressure to the balance of payments and rupiah, while government debt levels rise to subsidize higher fuel prices.
The external accounts already show the strain. April trade data showed Indonesia's goods trade surplus collapsing to USD 0.1bn — the lowest reading since April 2020, down sharply from USD 3.3bn in March and well below the USD 1.4bn consensus. Imports surged 22.5% YoY (versus 1.5% in March), led by mineral fuel imports. Encouragingly, the fuel expansion reflected higher volumes more than prices, and Indonesia is actively diversifying its energy sources — direct oil and gas imports from the Middle East have fallen to roughly 16% of total, down from ~33% in 2020. Should the U.S. Iran war truly come to an end and the Strait of Hormuz reopens, it will surely alleviate the pressures on fiscal spending to subsidize oil prices – providing a breather for the IDR and rates. However, even with some stability in energy prices, Indonesia’s trade balance will likely remain modest relative to past years.
The macro picture does not fully explain why Indonesian assets have traded as poorly as they have. The missing piece is the confidence channel — how policy decisions are read by foreign investors, domestic households, and external validators. As confidence has weakened, a wider risk premium has been priced into Indonesian assets, and investors have stepped back.
Indonesia's fiscal story has shifted meaningfully under the Prabowo administration, which took office in October 2024. President Prabowo Subianto came to power on an ambitious social-spending platform aimed at lifting human capital, reducing inequality, and broadening the country's growth base. His flagship initiative is a nationwide free meal program for schoolchildren and pregnant mothers, the largest social program in Indonesia's modern history. Indonesia has long been viewed by markets as a fiscally disciplined EM, with a constitutional 3% deficit cap and a track record of staying within it; the current spending agenda is testing investors' confidence in that anchor. The ~$15bn free lunch program is ambitious, with many focused on execution and budget discipline. On top of this, energy subsidies are tracking near $29bn, well above budget. With two of Indonesia's largest spending lines expanding simultaneously, markets have begun to question fiscal discipline.
Danantara, the new sovereign wealth fund consolidating state assets, fits broader Asian trends toward more active state-led capital allocation. The open questions are practical: governance standards, transparency, and investment frameworks are still being defined, including for the related Danantara Sumberdaya Indonesia (DSI) initiative, which centralizes commodity exports across palm oil, coal, and ferrous alloys. A related concern is the evolving licensing framework in strategic sectors, where long-tenured foreign investors are facing license reviews. Investors need to believe policy is stable before they engage with its direction. In response to this uncertainty foreign portfolio outflows have accelerated and domestic consumer sentiment has softened.
USD/IDR recently closed above 18,000 for the first time in history at 18,184, making IDR one of Asia's worst-performing currencies year-to-date. Asian currencies have broadly weakened against the USD due to higher energy costs and a hawkish repricing of the Fed. Indonesia, however, has been weaker relative to its peers, as it is a net importer oil, has a higher share of debt denominated in foreign currency (~30%), and confidence in government policy has declined.
While BI's actions have steadied the rupiah at the margin, it has put significant pressure on the domestic economy while only partially reversing the decline in confidence. Nowhere is that more visible than in equities. The Jakarta Composite Index is down close to 30% YTD, firmly in bear market territory. MSCI (a leading global index provider) flagged potential reclassification from Emerging Market to Frontier Market status, citing low free floats, concentrated ownership, and transparency gaps that limit global investor accessibility — concerns serious enough that MSCI froze any new additions or weighting increases to its Indonesian listings pending reforms.
Following investor outflows, significant declines in asset prices, and central bank tightening, equity valuations in Indonesia have reset meaningfully. The market trades around 9x 12-month forward P/E, roughly 2 standard deviations below the 10-year mean. Positioning is light, with foreign outflows totaling ~US$2.3bn YTD.
This significant decline in pricing has created selective opportunities. Indonesian commodity stocks have fallen more than 35% from peak levels despite rising profitability and ongoing capital returns, and several names now trade at more than 20% free cash flow yields in USD terms. Coal, CPO, and nickel — sectors where Indonesia controls roughly 45–60% of global supply — have historically been the most reliable long-term return drivers, with three-decade total returns ranging from 13% to 30% CAGR..
The same selectivity theme extends to fixed income, which is the more constructive corner of the Indonesia opportunity set, particularly in U.S. dollar–denominated bonds issued in offshore market. Though the international rating agencies recently revised the outlook to negative, Indonesia sovereign/quasi-sovereign bonds are still rated two notches above non-investment grade. Despite headwinds from trade, energy prices, and FX weakness, Indonesia remains a credible EM credit — debt/GDP at ~40%, GDP growth of ~5%, an unemployment rate of 4.7%, and positive FDI are all solid. Recent underperformance has pushed yields on 10-year USD-denominated sovereign bonds into the mid-5% range, and lifted yields on some quasi-sovereign issuers to more attractive levels—near 6% for 10-year maturities. In a “higher for longer” global regime, that carry matters.
Current pricing creates opportunities across Indonesian bonds, FX, and selected equities, but only if there are visible signs of stabilization that can pull foreign investors back in. Until that improvement is evident, many will remain on the sidelines, waiting for confirmation rather than anticipating it.
There are several areas we’re monitoring. On monetary policy, we are watching the June and July BI meetings, FX reserves, and intervention activity as Bank Indonesia works toward a 6.00% terminal rate; credibility hinges on follow-through, and a more supportive global bond backdrop would ease pressure on rates and the rupiah. On fiscal credibility, we want clearer signals on the subsidy framework, the rollout of the free meal program, and Danantara's governance and licensing reviews. Recent clarifications on mineral royalties suggest policymakers are responsive — consistent communication from here would be a meaningful confidence-builder. External validators (S&P, Fitch, Moody's, MSCI, FTSE Russell) remain part of the tape, with MSCI's Annual Market Classification Review due June 23rd.
In short, valuations and positioning support a continued rally if global risk sentiment improves and energy headlines continue to ease, but the strategic setup keeps us selective until stabilization emerges. For clients with IDR exposure, NDFs can help separate the asset view from currency volatility. Since 2006, hedging MSCI Indonesia exposure delivered +6.2% annualized versus +2.7% unhedged, with lower volatility (23.4% versus 27.8%).
For illustrative purposes only. Estimates, forecasts and comparisons are as of the dates stated in the material. Indices are not investment products and may not be considered for investment.
All market and economic data as of June 2026 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
Past performance is not a guarantee of future returns and investors may get back less than the amount invested.
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