Ria Fortuna Wijaya, Heru Andriyanto, Jakarta – The rupiah's slide past Rp 17,000 per US dollar this week – briefly touching record lows before rebounding on ceasefire signals – underscores a deeper challenge facing Southeast Asia's largest economy: the currency's growing structural vulnerability to external shocks.
While recent volatility has been driven by escalating tensions in the Middle East, economists say the rupiah's weakness reflects more than short-term geopolitical pressures. Instead, it points to underlying domestic conditions that are leaving the currency increasingly exposed.
The government and Bank Indonesia (BI) have deployed a range of measures to stabilize the exchange rate. Foreign exchange reserves fell by $3.7 billion last month to $148.2 billion, partly due to central bank intervention in financial markets. BI Governor Perry Warjiyo said the central bank has purchased Rp 90 trillion ($5.3 billion) in government bonds in the secondary market since the start of the year to support the rupiah, following Rp 332.1 trillion ($19.5 billion) in bond purchases in 2025.
On the fiscal side, authorities are seeking to bolster dollar inflows through commodity-linked revenues. The Finance Ministry is targeting an additional Rp 23 trillion in state income from export levies on coal and gold, while also exploring a windfall profit tax on coal exports amid elevated global prices. The government has also tightened regulations requiring natural resource exporters to retain a portion of their foreign exchange earnings in domestic banks.
Despite these efforts, the rupiah's trajectory throughout 2026 suggests that policy interventions have had limited success in anchoring the currency.
Why is rupiah so vulnerable?
At one level, the immediate trigger is clear. Rising geopolitical tensions have pushed investors toward safe-haven assets, strengthening the US dollar and prompting capital outflows from emerging markets, including Indonesia. However, economists argue that these external shocks are landing on already fragile domestic fundamentals.
Telisa Falianty, an economics professor at the University of Indonesia, said the rupiah has entered a "new equilibrium of depreciation," with annual weakening of around 2.5%-3.5% becoming structural rather than cyclical.
"We have not returned to the old equilibrium," she said, pointing to both fundamental and non-fundamental pressures.
Deeper structural vulnerabilities
On the fundamental side, relatively loose monetary conditions and expanding domestic liquidity have weighed on the currency. Narrowing interest rate differentials have reduced the rupiah's attractiveness to investors, while a weakening balance of payments and declining foreign reserves have eroded external buffers.
Inflation dynamics are adding further pressure. A positive inflation gap compared to global peers – driven in part by demand-supporting growth policies – has compounded depreciation risks.
At the same time, non-fundamental factors are accelerating the trend. Global financial volatility, a stronger dollar index, and rising geopolitical risk premiums are creating spillover effects that transmit quickly into domestic markets.
This dynamic also helps explain why Indonesia's commodity windfall has not translated into sustained currency strength. Telisa said export gains are offset by external debt servicing obligations and import demand, while a significant portion of export proceeds remains offshore, limiting the net impact on foreign reserves.
Bank Indonesia's Senior Deputy Governor, Destry Damayanti, maintains that commodity gains have helped cushion the currency.
"The impact of the Middle East conflict is twofold. Rising commodity prices and Indonesia's position as an exporting country can generate positive effects for the economy, helping offset exchange rate pressures caused by the escalation," she said in a statement.
BI's intervention has limits. While its market operations can smooth volatility, they cannot defend a specific exchange rate level indefinitely without risking further depletion of reserves and undermining policy credibility, Telisa warned.
Similarly, stricter rules on export proceeds may increase foreign exchange supply in the short term but risk constraining corporate liquidity. Teuku Riefky, an economist at the University of Indonesia's Institute for Economic and Social Research (LPEM), said the policy's impact is likely to be limited and insufficient to counter broader market forces.
Ultimately, the rupiah's sensitivity to external shocks reflects a deeper issue: investor confidence. Concerns about fiscal discipline, policy consistency, and governance have intensified capital outflows amid heightened global risk aversion.
The key is to rebuild investor confidence through credible fiscal management, disciplined monetary policy, and coherent reforms, Telisa said. Until then, each geopolitical shock abroad will continue to echo loudly in the rupiah.