The Tamesis
Indonesia has not been in the spotlight of the global economy for decades. The collapse of Jakarta’s currency is changing that, putting Jakarta at the center of a tumultuous 2026.
This is not to say that the Indonesian rupiah’s 6.2% fall this year to a 1998 low poses a systemic risk to the world economy. As the fallout from the Iran war intensifies, Indonesia’s $1.5 trillion economy is at the forefront of emerging economies.
In India, the rupee is testing all-time lows. The same goes for the Philippine peso. In Seoul, President Lee Jae-myung is grappling with a split-screen problem that few saw coming. On the one hand, the Kospi stock index is soaring – up 86% so far this year. On another screen, the South Korean won has fallen nearly 5% since January 1. South Korea’s stock market rally is largely due to excitement about artificial intelligence, a “new economy” technology that relies on memory chips made by Samsung Electronics and SK Hynix.
While all this excitement is reshaping Korean companies, the “old economy” underneath doesn’t seem ready for prime time. Capital outflows from South Korea reflect ongoing geopolitical tensions in the Middle East, which is driving safe-haven demand. Investors are seeking higher yields in the United States and elsewhere than in most Asian economies.
The development prompted Indonesia’s central bank to draw a line under its leadership this week. The central bank raised interest rates by 50 basis points to 5.25%, exceeding expectations and surprising the market. This is the first such move by Bank Indonesia since 2022 and is clearly aimed at laying the groundwork for the rupiah against the US dollar, which recently hit a 28-year low of around 17,600. It also shows that Bank Indonesia Governor Perry Warjiyo’s team is worried about losing control of the currency.
So far this year, Jakarta has used $10 billion in foreign exchange reserves to stabilize the rupee. Last week, Indonesia’s finance ministry purchased about $113 million a day in government bonds to control the bond market and limit capital outflows.
The good news is that first-quarter growth returned to 5.61% year-over-year, which “will make it easier for the economy” to absorb higher short-term interest rates, said Sarah Tan, an economist at Moody’s Analytics. The bad news, she added, is that “Bank Indonesia’s intervention in foreign exchange markets to support the weak rupiah has not stabilized the exchange rate and currency reserves are dwindling.”
There are indeed valid reasons for the rupee’s fall. These include long-term budget and current account deficits, weak exports, concerns about domestic policy and the way rising energy costs are exacerbating these problems. Investors and credit rating firms are concerned about President Prabowo Subianto’s government’s massive spending policies and efforts to influence central bank decisions.
Meanwhile, index giant Morgan Stanley Capital International (MSCI) is reviewing the operations of the Indonesian stock market to determine whether it is necessary to downgrade its rating to “frontier” from “emerging” status. MSCI expressed concerns about exchange transparency. Earlier this month, Morgan Stanley Capital International (MSCI) announced it would remove six companies from its Indonesian index, some of which are linked to the country’s richest billionaires.
Prabowo’s sudden dismissal of internationally renowned Finance Minister Sri Mulyani Indrawati in September 2025 did Indonesia no favors. The former World Bank president has long been seen as a key guardrail against fiscal overextension. Now, with the global economy in trouble, Indonesia can certainly use that skill and gravitas to lead Southeast Asia’s largest economy.
The thing is, Jakarta can try to assign blame and return it to a crisis zone. But the exchange rate doesn’t lie. Indonesia tells us this place is in danger again. Expanding it to the wider Asian region as well.
