Indonesia’s rupiah has fallen to its weakest value against the US dollar since the Asian financial crisis of 1998, driven by heightened fears regarding President Prabowo Subianto’s fiscal policies. On Tuesday, the currency declined by as much as 0.5%, reaching 16,640 to the dollar, approaching its all-time low of 16,800 recorded in June 1998.

Central Bank Interventions

In response to the rupiah’s decline, Bank Indonesia, the nation’s central bank, engaged actively in the bond and currency markets. A representative stated, “We intervened to ensure the stability of the rupiah exchange rate and maintain the balance of foreign exchange demand and supply, thereby maintaining market confidence.”

The bank also indicated that recent fluctuations are largely fueled by external uncertainties, including shifts in US tariffs, the Federal Reserve’s potentially aggressive monetary policy, and ongoing geopolitical issues.

Impact of Fiscal Policies

Despite the central bank’s assertions regarding external factors, investor anxiety appears to be closely linked to President Subianto’s expansive fiscal initiatives. Notably, a proposed program offering free lunches to schoolchildren and pregnant women is costing an estimated $28 billion annually, leading to tighter government finances and an unexpected budget deficit in the year’s early months.

Concerns about a potential economic slowdown further aggravate the situation. Analysts warn that a sluggish economy may prompt the central bank to cut interest rates, which could place additional downward pressure on the rupiah.

Market Reactions

Evaluating the situation, fund manager Viktor Szabo from Aberdeen Investments remarked, “The big picture is that of a fiscally less responsible government.” The rupiah has notably underperformed this year among major Asian economies, with a decline of nearly 3% against the dollar. Moreover, the Jakarta stock index has lost approximately 14% in dollar value since the beginning of 2025.

Historical Context

Indonesia faced severe repercussions during the currency crisis that erupted following the devaluation of the Thai baht in 1997. This crisis led to economic turmoil and required the country to seek assistance from the International Monetary Fund. The resultant unrest contributed to the collapse of Suharto’s long-standing regime.

In the aftermath, Asian monetary authorities adopted strategies to bolster foreign reserves and intervene in currency markets to avert similar situations.

Current Reserve Status

As of early this year, Indonesia has drawn down approximately $1.5 billion from its foreign reserves, totaling roughly $154 billion, to support its currency. The central bank has routinely engaged in spot and non-deliverable forward markets to stabilize the rupiah.

Analysts from Barclays predict that the rupiah’s underperformance will persist into the second quarter, despite an anticipated softer dollar in the short term, citing ongoing fiscal challenges and adverse sentiment from foreign investors.

Corporate Impact and Global Relations

Indonesian businesses are also feeling the pressure from the influx of relatively inexpensive Chinese goods in emerging markets. This situation may escalate if the United States increases tariffs on China. For instance, Sritex, a prominent garment manufacturer in Indonesia, ceased operations last month due to this competition.

Amid these economic challenges, attention has shifted towards the management of a new sovereign wealth fund. The Danantara fund recently announced high-profile foreign advisers, including billionaire investor Ray Dalio. However, uncertainties regarding potential political influence over the fund’s operations remain a concern for investors.

JPMorgan analysts noted, “We think that there is still uncertainty on the execution and operation of the fund, which could keep markets volatile given the government’s aggressive spending plans.”