Indonesia's economy is in crisis: currency big dump and social unrest

Indonesia is currently experiencing a severe economic crisis, with violent protests, currency devaluation, and political tensions severely undermining confidence in what was once seen by Wall Street as Southeast Asia's most stable market.

On Monday, the Jakarta Composite Index plummeted by 3.6%, and the Indonesian rupiah continued to depreciate against the US dollar. This crisis stems from the public's intense dissatisfaction with skyrocketing living costs, hefty salaries of politicians, and police violence, becoming the most severe challenge faced by President Suharto since taking office.

At least eight people have already died in the conflict, and the streets of major cities like Jakarta are filled with protesters. On Sunday, Subianto promised the media that the parliament would take the public's anger seriously and that lawmakers would be forced to cut huge allowances. At the same time, he warned that “decisive action” would be taken against demonstrators who disrupt order, stating that certain groups are “heading towards treason and terrorism,” and has ordered the military and police to severely deal with looting and violence.

I witnessed firsthand how this crisis rapidly evolved. The government tried to soothe market sentiment, with Indonesia's Chief Economic Minister Airlangga claiming that the economy's “fundamentals are strong,” and promised to boost the economy through a new stimulus package. Unfortunately, investors were not convinced at all, and the Indonesian rupiah and stock market suffered heavy blows after the protest news broke.

The Indonesian central bank has stated that it is ready to intervene in the market at any time to bring the Indonesian rupiah back to its actual value. The bond market has also been affected, with the yield on 10-year government bonds rising to 6.335%, while the yield on 30-year government bonds remains around 6.850%, reflecting investors' demand for higher risk premiums.

Ironically, some international investment institutions such as BlackRock have not divested but instead increased their holdings in Indonesia's long-term government bonds. DBS Bank economist Radhika claims that the country's long-term growth prospects remain intact. However, this optimistic rhetoric stands in stark contrast to the reality on the streets.

As the fourth most populous country in the world, Indonesia has a population of 284 million and has long been viewed as a reliable emerging market. However, this image is now being shaken. With ongoing street clashes and political promises flying around, the focus has shifted to whether the government can quickly regain control and whether foreign capital will continue to stay in this turbulent market.

For the Indonesian government, time is running out. Protests will not subside on their own, and currency pressures will not ease magically. With investors becoming increasingly cautious and the public strongly demanding solutions, Indonesia can no longer afford to delay.

The crisis in Indonesia reminds us that even emerging markets considered stable can quickly fall into turmoil due to political and economic issues. Whether this storm can subside depends on how the government balances public demands with the restoration of market confidence.