INDONESIA: Political Uncertainty Tests Indonesia's Growth Story as Markets Reassess Risks

Political uncertainty challenges Indonesia's economic momentum as investors reassess risk and growth prospects.

With Indonesia's GDP growth at 5.12% in the face of social tensions, EBC Financial Group highlights investors' caution.

INDONESIA, September 24, 2025 /EINPresswire.com/ -- Indonesia's economy grew 5.12 percent year-on-year in the second quarter, reinforcing its resilience as an engine of regional growth. However, recent political tensions — marked by widespread protests, falling investor sentiment and pressure on the rupee — have reconfigured the narrative about stability and confidence in Southeast Asia's largest economy.

The rupiah fell to around Rp16,500 per dollar,

the Jakarta Composite Index retreated below 3% and 10-year bond yields rose to 6.335% as investors demanded higher returns to hold Indonesian assets. Government officials — including Chief Economy Minister Airlangga Hartarto and the Bank of Indonesia — say the country's economic fundamentals remain solid, even with the removal of Finance Minister Sri Mulyani Indrawati and continued detentions following violent protests, which highlight political uncertainties affecting sentiment.

— "Indonesia's structural growth narrative continues to demonstrate resilience, supported by favorable demographic trends, accelerated digital transformation, and the country's strategic position in global commodity markets. These long-term fundamentals provide a solid foundation for sustainable economic expansion and market development," said Samuel Hertz, Head of APAC at EBC Financial Group.

Hertz added:

"However, current market conditions reflect the complex interplay between macroeconomic fundamentals and investor sentiment dynamics. In periods of heightened uncertainty, market participants often engage in risk-averse behavior, which can create temporary disconnects between asset valuations and the underlying economic reality."

Solid fundamentals underpinning the economy

Hartarto highlighted Indonesia's growth trajectory, citing consumer demand, infrastructure and commodity exports as key drivers. However, analysts at the East Asia Forum noted that the protests act as a "wake-up call" for Jakarta to balance growth and governance.

EBC analysts noted that investors are reducing positions in Indonesian assets due to the rising political risk premium amid leadership transitions. High-profile policy changes, including Sri Mulyani's departure, amplify concerns about policy continuity at a time when global markets are already in risk-averse mode. Divestment reflects portfolio risk management, not deterioration of economic fundamentals.

Economic Disruptions Beyond the Markets

Civil unrest in Indonesia has begun to translate into measurable economic losses, with retailers reporting damages in excess of Rp500 billion (US$30.4 million) and disruptions to digital commerce affecting small businesses across the country.

The suspension of sales via TikTok Live particularly impacted small and medium-sized businesses (SMEs) that increasingly relied on social commerce platforms for revenue generation. These digital channels have become an essential sales route in recent years, allowing direct connection with 185 million active users in the archipelago.

"Social stability remains a critical but often undervalued factor in emerging market valuations," Hertz said. "The consumer discretionary and retail sectors face immediate impacts on earnings due to the prolonged disruptions, regardless of broader macroeconomic resilience."

The riots highlight the vulnerability of consumption-driven sectors in the face of social tensions. EBC analysts noted that while overall economic indicators may absorb these shocks in the near term, continued disruptions may prompt consumer-focused investors to adopt defensive positions, altering sectoral allocation strategies in Indonesian equity portfolios.

Politics under Observation

Market participants are closely following the government's decisive actions in the coming days. Recovery and confidence will depend on how quickly political and security issues are resolved. Meanwhile, officials, including President Prabowo, have pledged measures to restore order and manage public dissatisfaction, including revoking legislative privileges, cracking down on riots, and injecting Rp200 trillion ($12.1 billion) into the economy — but the effectiveness of these actions has yet to be proven.

The Bank of Indonesia, the country's central bank, has signaled readiness to stabilize markets using intervention and liquidity tools, assuring investors that volatility will be managed.

For global investors, Indonesia's volatility is not isolated. It reflects broader emerging market dynamics, where politics, policy credibility, and governance weigh as much as growth indicators.

— "While Indonesia's GDP data remains robust, political uncertainty could quickly alter risk sentiment and capital allocation decisions," Hertz noted. "Market confidence goes beyond pure economic fundamentals — social and political stability are equally determinant of investors' positioning in emerging markets."

Disclaimer: This article reflects the observations of EBC Financial Group and all of its global entities. It does not constitute financial or investment advice. Trading commodities and foreign exchange (FX) involves significant risk of loss, which can exceed your initial investment. Please consult a qualified financial advisor before making any trading or investment decisions, as EBC Financial Group and its entities are not liable for any damages arising from the use of this information.

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