Riandy Laksono – Trump's tariffs and the uncertainty around them have put the world economy in great turmoil. Raising a prohibitive tariff barrier around the world's largest consumer will surely make global economic projections bleak. But tariff escalation by trading partners, a pause, and then rounds of exemptions have made global investors even more anxious. Investors are losing their appetites for risk and delaying investment realisation, instead, moving their money into safer investments, like gold.
This time, no one is spared. The US stock market plummeted, while the yield on 10-year US treasury bonds rose on the back of Trump's tariffs, indicating a diminishing confidence in what is typically seen as a safe haven during crises. Stock markets in various nations have also fallen, though the pace of decline differs significantly from country to country. This variation is influenced by the level of exposure to U.S. exports and the risk profile that investors associate with each country.
Despite having a small overall trade exposure to the US and a modest portion of exports in its output, Indonesia's financial market is among the hardest hit by the threat that Trump's protectionism poses to the world economy. This reveals a much deeper problem within the Indonesian economy. Investors are growing uneasy not just due to global uncertainty, but also because the Prabowo administration's policy choices are straying away from macro and fiscal prudence, a principle that has supported Indonesia's stable growth for the past two decades.
Vote of no confidence?
Prabowo's flagship programs, such as free and nutritious meals (MBG) and Danantara (his new state-owned enterprise 'superholding' company cum sovereign wealth fund) have not been received very well by the market as they depend heavily on the state budget, thus adding more risk of straining fiscal capacity. This leads to unnecessary volatility in the market at a time when other regional markets are relatively stable.
During the first six months of Prabowo's administration, the price of Indonesia's stock market index (IHSG) has fallen by more than 17%, far worse than regional peers that have more export exposure to the US, such as Malaysia and Vietnam (see Figure 1).
Yet, during Trump's reciprocal tariff chaos, from 2 April (so-called 'liberation day') when it was first announced, to 9 April, when it was paused for a 90-day period, the IHSG declined like other countries in the region, but only by 8%. This suggests that the domestic policy environment may play a greater role in explaining the decline in the stock market in Prabowo's first semester.
In fact, most of the sell-off in Indonesia's stock market occurred outside the liberation day window and can almost always be traced back to Prabowo's flagship programs.
Figure 1. Comparison of stock price movement in the ASEAN region, 21 October 2024=100 (see original document)
The first significant IHSG decline in 2025 occurred between late January and mid-February, prompted by uncertainty regarding the budget efficiency cuts. Intended to fund Prabowo's major programs without violating the fiscal deficit rule, investors were concerned whether this efficiency initiative would actually turn out to be an austerity measure – suggesting potential economic hardship – or simply a reallocation of funds. The lack of a technocratic approach during the budget efficiency process, and ambiguity surrounding the new expenditure plan post-efficiency, further heightened market unease.
Prabowo's administration blames rising global risk for the decline in the IHSG at the start of 2025. This is understandable, given Trump slapped an additional 10% tariff on China in early February. However, the neighboring stock markets remained relatively steady during that time and Vietnam's even strengthened, possibly due to the potential for new trade opportunities to replace China.
The second major episode was when the Indonesian stock market crashed near the end of February following the formal announcement of Danantara.
Investors are wary that Prabowo's plans to implement his flagship initiatives in 2025, including the MBG meals program and 3 million housing projects, could strain the government budget and exceed deficit limits. This concern arises as state-owned enterprise dividends are expected to cease flowing into state revenue because of Danantara. Additionally, overall state revenue is anticipated to decrease due to a delayed increase in value-added tax and a slowdown in economic growth this year.
Another notable IHSG decline took place in mid-March 2025, triggered by a sharp drop in state revenue realisation during January and February 2025 compared to the same months in the previous year. The key factor here was the rushed implementation of Indonesia's new tax reporting system, Coretax, in the hope of raising higher revenue to fulfill Prabowo's 'quick wins' commitments as outlined in his campaign promises (the Asta Cita). As state revenue decreases, Indonesia becomes more likely to hit its deficit limit due to Prabowo's costly flagship projects, raising concerns among investors regarding the country's fiscal sustainability.
Concerns over fiscal prudence have also been reflected in the rising Indonesian bond yield since the launch of Danantara (see Figure 2). As Indonesian government-backed investment instruments are getting riskier due to haphazard fiscal policy management, investors demand a larger return (yield) to compensate for the risk. This will contribute to raising the borrowing cost in the future. The 90-day pause on Trump's reciprocal tariffs has, nevertheless, contributed to Indonesia's declining bond yield as risk perception has reduced due to the de-escalation of the tariff war.
Figure 2. Indonesia's Bond Yield Movement in 2025 (see original document)
Realigning priorities
The turbulence may soon turn into a (mild) recession. The US economy has reported a contraction in the first quarter of 2025, albeit mainly driven by the piling up of imports to avoid the full effect of Trump's reciprocal tariffs. Although the contraction needs to last at least two consecutive quarters for it to be formally considered a recession, the odds are getting higher now in the US than several months ago. This suggests that the global demand will likely cool off this year.
This means the top priority now is to protect the domestic economy from global uncertainty and the potential for stagnation or recession. This primarily entails increasing domestic consumption to absorb the surplus of production that struggles to find external buyers amid declining global demand.
To facilitate this, Prabowo's costly programs, like MBG and the capital injection for Danantara – which together total nearly Rp 500 trillion (approximately USD 30 billion) – must be scaled back. That would make room for a more comprehensive social protection package for workers and consumption stimulus to avert further economic decline in the short term.
Restoring confidence in the economy
To do this, restoring investors' confidence in the economy is critical. If the Rupiah and stocks keep falling due to eroding market confidence, as in the past few months, consumers will lose their purchasing power.
Maintaining fiscal prudence is also equally important. Rising bond yields will make borrowing more costly for the Prabowo administration, as higher interest rate payments will pose a risk to fiscal sustainability. This will limit flexibility in financing the required stimulus program needed to fight the global economic slowdown.
The stakes have never been higher. Indonesia recently recorded its worst growth performance of the post-pandemic era, having grown only by 4.87% on a year-on-year basis with a quarter-on-quarter contraction in the first three months this year.
Negotiating a concession with the US is likely only a temporary fix, given the greater risk of US and global recessions. As the external market will be less effective as a driver of growth during these turbulent times, so will efforts towards export diversification. The reason is simple: demand from all nations for Indonesia's products will cool off.
In light of the global trend of investors opting for safer investments, the viability of the investment-led growth model proposed through the creation of Danantara has also come under significant scrutiny.
As much of Indonesia's growth dries up, the country must prepare for the worst and protect the main engine that consistently proven reliable in times of crisis: domestic consumption.
Redirecting funds from flagship projects towards consumption-boosting measures can effectively help cushion the economy during a global slowdown. One idea is to increase cash handouts to middle and lower-income households, especially those facing a higher risk of layoffs during this difficult time. Indonesia's unemployment insurance scheme (Jaminan Kehilangan Pekerjaan) can also be made more generous by increasing its cash benefit and extending its duration to reflect the hardship workers face.
Prabowo needs to wake up from his populist dream and smell the coffee of economic reality. The sooner he realizes there is simply not enough money around to do everything he wants, the better it will be for macroeconomic stability, as it will help win back investor trust in Indonesia's fiscal prudence. And during turbulence, confidence in those in the driving seat is an expensive currency.