Indonesia’s Economic Woes Deepen as Prabowo’s Populist Policies Spark Market Turmoil

Indonesia, South-east Asia’s largest economy, is grappling with mounting economic uncertainty as President Prabowo Subianto’s ambitious populist initiatives collide with declining state revenues and growing investor unease. On 18 March, the Jakarta Composite Index, the nation’s benchmark stock index, plummeted by as much as 7% in intraday trading—its steepest drop since September 2011—before closing 3.8% lower at 6,223.4 points. The dramatic sell-off, which triggered a temporary trading halt, has intensified concerns over the sustainability of Prabowo’s policies and the broader health of the Indonesian economy.

At the heart of the turmoil is the President’s signature free meals programme for schoolchildren and pregnant women, launched in January 2025. Aimed at supporting 17.5 million people by the end of the year, the billion-dollar initiative is a cornerstone of Prabowo’s populist agenda. However, with tax revenues dropping by 30% in the first two months of 2025 and a rare budget deficit already recorded, questions are mounting over how the administration plans to fund such expansive commitments without further straining public finances.

“The government is launching ambitious populist policies, but the funding simply isn’t there,” said Anthony Budiawan, an economist with the Jakarta-based think-tank Political Economy and Policy Studies, speaking to The Straits Times. His remarks echo a broader sentiment among analysts who warn that the shortfall in tax collections could lead to reduced government spending, potentially triggering economic contraction.

A Perfect Storm of Economic Challenges

The market turbulence comes amid a confluence of domestic and global pressures. Indonesia’s economy, already showing signs of slowdown, has been hit by weakening consumption—a critical driver of growth. Deflation recorded in February, ahead of the Lebaran (Hari Raya Aidilfitri) celebrations when consumer spending typically surges, has further rattled confidence. Analysts view this as a troubling indicator of diminished purchasing power among Indonesians.

Adding to the gloom, mass layoffs have amplified fears of a deepening economic slump. According to the Indonesian Trade Union Confederation (KSPI), around 60,000 workers from 50 companies lost their jobs in January and February 2025. Among the hardest hit was Sritex, one of Indonesia’s largest textile firms, which shuttered operations in March after being declared bankrupt, leaving over 10,000 employees without work. KSPI chairman Said Iqbal pointed to an uncertain economic environment and factory relocations as key factors behind the job losses.

Beyond immediate economic indicators, Prabowo’s directive to reallocate funds towards priority projects has sparked concerns over fiscal discipline. The administration’s austerity measures, implemented to offset declining revenues, have done little to reassure markets. Instead, they have fuelled speculation about the government’s ability to balance its populist promises with economic stability.

Danantara: A Bold Vision or a Governance Risk?

Compounding investor unease is the launch of Danantara, Indonesia’s new sovereign wealth fund, on 24 February 2025. Positioned as a holding company for state-owned enterprises (SOEs), Danantara is a key plank of Prabowo’s plan to achieve an ambitious 8% economic growth target within his first term. By consolidating control over selected SOEs and reporting directly to the President, the fund aims to enhance their role in driving national development.

However, the initiative has drawn scrutiny over its governance structure. Critics question whether Danantara, overseen by a board that includes former presidents Susilo Bambang Yudhoyono and Joko Widodo alongside political allies and business figures, can navigate Indonesia’s notoriously complex bureaucratic landscape, often plagued by red tape and corruption. “There is no shortage of initiatives by the government, but there is a lack of public confidence over implementation and governance,” noted Chandra Pasaribu, head of research at Yuanta Sekuritas, a Jakarta-based equity brokerage.

The fund’s direct reporting line to Prabowo has also raised eyebrows, with some analysts suggesting it may concentrate too much power in the executive, potentially sidelining independent oversight. If governance concerns persist, Danantara risks becoming a lightning rod for criticism rather than a catalyst for growth.

Political and Market Jitters

Political undercurrents have further unsettled markets. Local media reports speculating about the possible resignation of Finance Minister Sri Mulyani Indrawati—a respected figure known for her prudent fiscal management—sent shockwaves through financial circles on 18 March. Though Sri Mulyani swiftly denied the rumours at a press conference, stating, “I am not resigning and will continue my role in safeguarding state finances”), the mere suggestion of her departure was enough to spook investors.

Addressing the day’s market volatility, the Finance Minister attributed the downturn to a mix of global and domestic factors, cautioning that it remains unclear whether the turbulence reflects deeper political or economic dynamics. “The finance ministry continues to manage the state budget with prudence and professionalism,” she added, in an apparent bid to restore confidence.

Despite these assurances, the market’s reaction underscores a broader erosion of trust in the administration’s economic stewardship. Analysts note that while Prabowo’s populist policies may resonate with large swathes of the population, their fiscal implications are proving to be a hard sell for investors seeking stability and predictability.

A Silver Lining Amid the Gloom?

Not all perspectives on Indonesia’s economy are uniformly bleak. Henry Pranoto, a Jakarta-based analyst, argues that the country’s macroeconomic fundamentals remain relatively robust. He points to Indonesia’s foreign exchange reserves, which reached a record high of US$156.1 billion at the end of January 2025, up from US$155.7 billion in December 2024. This, he suggests, provides the central bank with ample firepower to defend the weakening rupiah against external shocks.

Pranoto also highlights the attractiveness of Indonesia’s stock market, with a price-earnings ratio of 15 times—below the 10-year median of 20 times—and dividend yields at 4.5%, the highest in a decade. “Indonesia’s stock market currently remains very attractive,” he told The Straits Times, suggesting that the recent sell-off may present a buying opportunity for long-term investors.

Yet, even these optimistic assessments are tempered by caution. While strong reserves and undervalued stocks may offer some buffer, they do little to address the structural challenges facing the economy, including declining revenues, rising unemployment, and the fiscal strain of populist programmes. If tax collection continues to falter, the government may be forced to scale back spending, risking further economic contraction.

Navigating an Uncertain Future

As President Prabowo Subianto presses forward with his agenda, the balancing act between populist appeal and economic pragmatism grows increasingly precarious. The free meals programme, while laudable in its intent to address malnutrition and support vulnerable communities, exemplifies the broader challenge of funding expansive social initiatives in a fiscally constrained environment. Without a clear strategy to boost revenues or streamline expenditure, such policies risk becoming a liability rather than a legacy.

Moreover, the governance questions surrounding Danantara highlight the importance of transparency and accountability in driving investor confidence. If the fund is to succeed in revitalising Indonesia’s SOEs, it must demonstrate a commitment to best practices, free from political interference or perceptions of cronyism. Failure to do so could further erode trust, both domestically and internationally.

For now, Indonesia stands at a crossroads. The market sell-off on 18 March serves as a stark reminder of the fragility of investor sentiment in the face of economic uncertainty. While Prabowo’s vision for the country is undeniably ambitious, translating it into sustainable growth will require careful calibration of policy priorities, robust fiscal management, and a renewed focus on rebuilding confidence.

As South-east Asia’s economic powerhouse navigates these choppy waters, the coming months will be critical in determining whether Indonesia can weather the storm—or whether the cracks in its economic foundation will widen further. For millions of Indonesians, from laid-off factory workers to schoolchildren awaiting their next meal, the stakes could not be higher.