Market jitters and state fund Danantara’s gamble: Can Indonesia win back investors?

[JAKARTA] It has been a frenzied first quarter for Indonesia so far. South-east Asia’s largest economy is facing mounting pressure, with the rupiah hitting its lowest point since the Asian financial crisis, compounded by last week’s shocking equity market meltdown.

As markets digest the turn of events – led partly by the exit of foreign institutional investors amid uncertainties over Indonesia’s economic prospects and signs of some political fissures – is there any silver lining?

The stock market’s key barometer, the Jakarta Composite Index, has lost 8.4 per cent since the start of the year, with US$1.83 billion in foreign capital having fled the market.

A big part of that was due to the 7 per cent drop in the index benchmark last week. Investors are adopting a risk-off stance, driven by mounting uncertainties such as escalating tariff wars and shifting US Federal Reserve policies.

But it may be domestic issues that are spooking investors more.

President Prabowo Subianto’s recent policy manoeuvres are adding fuel to the fire, prompting investors to step back and wait for clearer signals before making the next move.

Gone are the days when Indonesia was viewed favourably as a supply chain alternative to China during US President Donald Trump’s first term. These days, Indonesia is viewed no differently from many of its regional counterparts in terms of its susceptibility to Washington’s policy and tariff shifts.

“No such thing as a free lunch”

Since taking office last year, Prabowo – who has set a target for growth of 8 per cent – has ramped up public spending to push his ambitious populist initiatives, including a free meal programme that requires a heavy financial lift.

His bold, and often abrupt, policy moves – many of which face strong public backlash – have also made markets jittery. From the sudden U-turn on the value-added tax hike to the swift approval of the contentious military law revision, these episodes have escalated domestic tensions.

The recent speculation about Finance Minister Sri Mulyani Indrawati’s potential departure has further stirred the pot, sparking concerns that Indonesia may be drifting away from fiscal prudence – which has been a foreign investor magnet in recent years.

While Sri Mulyani has reassured the public that she will remain in office, the risks surrounding the direction of Prabowo’s fiscal policy persist.

The potential worsening fiscal deficit is a big worry.

A steep 30 per cent drop in tax revenue during the first two months of this year has added strain to the government’s coffers, which had already been squeezed by a budget cut exceeding 300 trillion rupiah (S$24.3 billion), painting a troubling picture for Indonesia’s economic outlook.

Several banks and rating agencies have slashed Indonesia’s growth forecast to below 5 per cent this year, warning that government budget cuts could further squeeze consumer spending.

There are other, no less significant, concerns.

In a major shake-up of Indonesia’s state-owned enterprise management, Prabowo established the multibillion-dollar Danantara fund to channel investments into his priority projects, with direct oversight under his administration.

However, the fund has sparked unease in the market, as it seeks greater control over state-owned assets, estimated at around US$900 billion.

On the back of that, shares of state-owned banks Bank Mandiri, Bank Negara Indonesia and Bank Rakyat Indonesia have suffered a major beating. Year to date, Bank Mandiri’s stock has fallen by 13.4 per cent, Bank Rakyat Indonesia is down 7.3 per cent, and Bank Negara Indonesia has dropped 3 per cent.

Not always stormy weather

In the midst of this perfect storm, some new developments provide some comfort, although it is still early days.

Danantara unveiled its new management structure on Monday (Mar 24), featuring a line-up of high-profile figures.

The advisory board includes hedge fund manager Ray Dalio, economist Jeffrey Sachs and former Thai prime minister Thaksin Shinawatra, with former Indonesian presidents Joko Widodo and Susilo Bambang Yudhoyono on the steering committee.

Danantara’s newly appointed CEO Rosan Roeslani has been working to reassure investors that the fund will remain independent of political influence.

Since the announcement, Jakarta’s benchmark stock index has risen for four consecutive days, with a cumulative gain of 5.3 per cent.

This underscores the need for clear policy direction in navigating Indonesia’s evolving regulatory environment. Historically, strong signals from leadership have been essential to rebuilding confidence.

It is too early to tell if Danantara’s charm offensive can win over investors. A “dream team” may look good on paper, but its success will depend on how well they collaborate and make independent investment decisions – key indicators eagerly awaited by investors.

With a wave of dividends from state-owned enterprises set to flow into its coffers in the coming weeks, Danantara is poised to be flush with cash.

The billion-dollar question: How will it deploy this war chest? Will it scoop up bonds, buy back battered stocks, or chart an entirely different course?

Whatever the choice, Danantara’s first major move will be more than just an investment – it will be a statement, shaping both its reputation and Indonesia’s economic standing in the eyes of investors.

With the Idul Fitri long-weekend holiday around the corner and the need to set up operations, investors may have to wait until May for a clearer picture of Danantara’s strategy. Until then, execution risks remain a key factor to watch.

Resilience – a tightrope walk

Indonesia’s market resilience is facing a true test. As economic policies remain in flux, investors are walking a fine line, cautious of sudden changes that could throw them off balance.

Over the past decade, Indonesia has fortified its resilience against external shocks, amassing record-high foreign exchange reserves and keeping foreign currency debt low.

With external debt at just 27 per cent of gross domestic product and short-term debt a mere 3 per cent, the country stands among the least indebted in the region. The country is the least leveraged economy in Asia, with debt levels well below 90 per cent of GDP.

Yet, market sentiment is shaped by more than just numbers. Perception must align with reality, and facts on the ground have the final say.

As global investors seek safe havens amid the US-China trade war, Indonesia cannot afford to let this golden opportunity slip through its fingers, especially with long-term investment prospects still on the table.

To sustain investor confidence, the country must prioritise stability over uncertainty, ensuring that opportunity does not get lost in the noise of unpredictability.