Indonesia’s Economic Strain: Market Volatility and Policy Shifts

Name: Why Investors Are Losing Confidence in Indonesia
Uploaded: 2026-06-12T08:00:05+00:00
Duration: 11 min 6 s
Channel: Bloomberg Originals
Description: Summary and key takeaways on Why Investors Are Losing Confidence in Indonesia — Summary, covering Economic Overview Indonesia’s economy tops Southeast Asia

Bloomberg Originals

Jun 12, 2026

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11 min video

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2 min read

YouTube video ID: WQ3KDgazkRk

Source: YouTube video by Bloomberg Originals — Watch original video

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Indonesia’s economy tops Southeast Asia, with a $1.5 trillion gross domestic product that surpasses the combined output of Singapore and Thailand. More than 280 million people live in the archipelago, and a large share of the population is under 30 years old. The country supplies the world with palm oil, nickel, thermal coal, and even consumer items such as Barbie dolls and Hot Wheels.

Historical Context

During the 1970s and 1980s the nation grew at 6‑8 % under President Suharto, despite widespread corruption and human‑rights abuses. The 1998 Asian financial crisis collapsed the banking system and forced Suharto to resign. Subsequent democratic reforms capped the budget deficit at 3 % of GDP and restored fiscal discipline. When Joko Widodo took office in 2014, he pursued market‑friendly policies that attracted foreign infrastructure investment and earned Indonesia the label of a “rising star.”

Current Economic Challenges

Wealth disparity has intensified, shrinking the middle class since 2018 and swelling the ranks of vulnerable households. Protests are expected in 2025 as living costs rise. The 2025 budget deficit reached its highest level in two decades, excluding pandemic years, while the rupiah fell to an all‑time low against the US dollar in 2026. Social‑welfare programs such as free meals and fuel subsidies strain public finances and push the deficit toward the 3 % legal limit.

Market Integrity Issues

Indonesia’s stock market has dropped 19 % over the past year, and the phenomenon of “deep fried stocks” has amplified volatility. These stocks have very low free‑float ratios, meaning a small amount of trading can move prices dramatically. MSCI warned that the country could lose weight in its index or be reclassified as a frontier market. In March 2026 regulators responded by doubling the minimum free‑float requirement to curb manipulation.

Government Strategy

President Prabowo Subianto is steering the economy toward state‑led capitalism. The newly created Danantara sovereign wealth fund will manage state‑owned enterprises and attract foreign capital. A state‑appointed company will oversee exports of palm oil, coal, and nickel to prevent under‑invoicing, a practice that ships profits offshore to avoid domestic taxes. Revenues from these measures are earmarked to fund the multi‑billion‑dollar free‑meals program.

Mechanisms Behind the Turbulence

Low free‑float requirements enable “deep fried stocks” to experience rapid price spikes and crashes because modest trading volume can shift prices significantly. Under‑invoicing reduces tax receipts, prompting the government’s export‑monitoring company to capture lost revenue. Expensive social programs combined with fuel subsidies create fiscal pressure that threatens to breach the 3 % deficit ceiling, undermining investor confidence.

Takeaways

Indonesia’s $1.5 trillion GDP makes it the largest Southeast Asian economy, but the stock market has fallen 19 % in the past year and the rupiah hit all‑time lows in 2026.
Wealth disparity has widened, with the middle class shrinking since 2018 and protests expected in 2025 over rising living costs.
Low free‑float requirements enable “deep fried stocks” to swing wildly on modest trading volume, prompting MSCI warnings and a regulatory move to double the minimum free‑float level.
President Prabowo’s state‑led capitalism includes the Danantara sovereign wealth fund and a state‑appointed exporter to curb under‑invoicing of palm oil, coal, and nickel, aiming to fund costly social programs.
Fiscal pressure from free‑meal schemes and fuel subsidies pushes the budget deficit toward the 3 % legal cap, threatening investor confidence and risking a downgrade to “frontier market” status.

Frequently Asked Questions

What are "deep fried stocks" and how do they affect Indonesia’s market?

Deep fried stocks are heavily manipulated equities with very low free‑float ratios, meaning a small amount of trading can cause large price swings. This volatility erodes market confidence, triggers warnings from index providers like MSCI, and has led regulators to raise free‑float minimums.

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Helpful resources related to this video

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Principles Of Economics Textbook Recommended

Provides a foundational understanding of fiscal policy, budget deficits, and market dynamics, which are essential for analyzing Indonesia's current economic challenges.

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The Intelligent Investor By Benjamin Graham

A classic book on value investing that teaches how to identify market manipulation and avoid 'deep fried' or overvalued stocks.

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Global Macro Trading Strategies Book

Explains how currency devaluation, sovereign wealth funds, and geopolitical shifts impact international markets and investor sentiment.

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Full Transcript YouTube

Fried food.
What’s not to love?
It’s delicious, but also generally bad for you.
And curiously,
the same could be said of some stocks in Indonesia.
In fact, they’re often called - 
deep fried stocks.
While they may look tasty on the outside.
Inside - they’re really not that healthy.
Unhealthy stocks are just one of the reasons 
investors have become wary of Indonesia’s stock market,
which until recently, was the biggest in Southeast Asia. 
And concerns are growing 
over the country’s potential for growth more broadly.
Just three to four years ago,
it was an investor’s darling.
There was so much buzz.
It’s one of the fastest
growing economies in the world.
At $1.5 trillion, Indonesia’s GDP
is more than Singapore’s and Thailand’s combined.
Within Southeast Asia itself,
 Indonesia is the largest economy.
Indonesia wants to be on the world stage.
It wants to grow faster.
And it has all the ingredients for it.
But fear of corruption and policy missteps -
both in markets and government 
is putting this path at risk.
Moody’s warns Indonesia’s tighter export controls
may spook investors.
The Indonesia market here down about 19%
in the past year.
Indonesia’s currency, the rupiah,
has fallen to all time lows against the US dollar in 2026.
And analysts doubt it will rebound any time soon.
It’s actually one of the
worst performers against a dollar in Asia.
And that sends an incredibly strong signal
to investors that things aren’t fantastic.
This could have a ripple effect
across one of the fastest
growing regions in the world.
Indonesian assets are often seen
as a barometer for risk appetite in Asia.
So can Indonesia regain investor confidence?
Or does this mean a stomachache
for all of Southeast Asia?
Indonesia is the world's fourth
most populous country
with more than 280 million people.
That’s spread across an archipelago.
If you strung it out
from across the Atlantic Ocean,
it would stretch from New York to London.
There's also a higher group of younger people living in Indonesia.
Which makes it an attractive consumer market.
Fashion brands from Uniqlo
to Zara all have operations here.
It is, the world's biggest producer of Barbie dolls.
One of the biggest producers of Hot Wheel cars.
It's the world's largest palm oil exporter,
nickel producer,
and the world's largest exporter of thermal coal.
Such vast natural resources have meant
Indonesia always had a lot going for it.
Indonesia's economy really took off in the 1970s
and 80s, the country was a net oil exporter.
It was a member of OPEC.
And during those years it was growing at
6%, 7%, 8% sometimes.
Much of this growth was overseen
by President Suharto.
Although his authoritarian regime
raised living standards and expanded the economy,
it was also marked by widespread corruption
and serious human rights abuses.
Tensions came to a head in the late 90s,
when the Asian financial crisis
triggered a collapse in regional currencies
and plunged Indonesia
into economic and political turmoil.
In Indonesia,
the rupiah, was particularly hard hit.
And eventually it led to,
the near collapse of the banking system.
Suharto was forced to resign in 1998.
And it really ushered in a new age of
democracy and financial controls in Indonesia.
A lot of them are still in place today
including one of the biggest one
that international investors watch,
which is the three percent cap on budget deficit spending.
Limits on deficit spending presented
Indonesia as a responsible nation.
Foreign investments coming into the country
soared in the 2000s. 
Surpassing Vietnam, Malaysia and Thailand.
This helped fuel the nation's GDP.
With the exception of the Asian financial crisis and Covid
Indonesia has had steady growth
of around 5% a year for the past two decades.
By 2014, when Joko Widodo assumed the presidency,
Indonesia was viewed as the rising star in the region.
Joko Widodo started to implement 
much more market friendly policies,
allowing foreign investors to come in
to areas such as infrastructure.
Trying to get companies to invest 
in the country's commodity market.
And that actually generated a lot of excitement
among not just domestic businesses
or foreign companies,
but also to the larger international market.
But prosperity on paper has concealed
the nation's pervasive wealth disparities,
which led to violent protests in 2025.
Public outrage over inequality and rising living costs.
The country's middle class,
shown here in red, has shrunk since 2018,
with the number of vulnerable and poor rising.
Indonesia's current president
has approached these problems from a new angle.
President Prabowo Subianto has
deep believes in state-led capitalism.
One strategy has been to launch a sovereign wealth fund
like those in Singapore or the Middle East.
It's named Danantara.
The idea is to actually manage
hundreds of the country's state owned enterprises,
which the president has deemed as being inefficient.
It's supposed to also get foreign investments.
One of the major concerns with
Danantara is simply governance.
It's seen as some sort of a piggy bank
to fund some of the president's social policies.
And that is creating some confusion among foreign investors.
Prabowo has also announced plans
to tighten control
over some of the country's biggest commodities,
calling for a new state
appointed company to manage
exports of palm oil, coal
and some nickel products.
The intention of this policy is to crack down on 
something called under-invoicing.
Which basically allows you to ship some of those profits offshore
avoid taxation in Indonesia.
Because it is under Danantara, 
it will be market friendly, it will be for profit.
It would also boost state revenue needed 
to fund Prabowo’s costly flagship plans,
including his multi-billion-dollar
free meals program
for schoolchildren and pregnant women.
Our free meals strengthen our economy.
The program is popular among some voters.
But so far,
positive effects across the economy
have yet to materialize.
It's also created strain
on the country's budget.
Because of these expensive social welfare programs
the country is actually close to breaching
 its three percent legal limit.
Not including the pandemic years,
Indonesia's budget deficit in 2025 
hit its highest level in the past two decades.
International investors are worried that
the fiscal state isn't quite what it used to be.
This leads us back to
those deep fried stocks.
It’s how people in Indonesia call stocks 
that are heavily manipulated.
Large amounts of stocks
in Indonesia are owned
by the nation's wealthiest tycoons.
And because of this concentration,
the amount of shares available for public trade - 
called free float - is actually quite small in some stocks.
And ownership isn't always transparent.
Most countries set a minimum free float requirement
to make sure markets stay liquid.
But in Indonesia, that requirement 
is much lower than in many other markets.
You can see that here. 
Until recently, 
Indonesia had the lowest free float requirement in the region.
A low free float means it only takes 
a relatively small amount of trading volume
to move the price significantly.
And because of this, prices can rise very quickly.
But crash very fast. 
Such market irregularities
Such market irregularities prompted MSCI,
a global stock market index provider
 to warn that it may reduce Indonesia’s weight
in its emerging markets index. 
The most shocking element was the prospect 
of potentially downgrading
Indonesia’s stock market to frontier market status.
In the stock market
you saw a selloff that you hadn't
seen since the 1998 financial crisis.
And months later,
the market is still one of the worst
performing in the world.
It impacts where they are
in the pecking order
of a particular investment universe.
Another clear indicator of stress
are the high yields
Indonesia is paying on its bonds.
The higher the bond yields, the more
a certain government needs to pay
for those who invest in the nation's bonds.
In Indonesia's case, 
it's one of the highest in Asia.
Prabowo’s government is trying to limit the damage.
And has vowed to address
some of these structural issues.
In March, financial regulators approved a measure
to double the country's minimum free float requirement.
Now, the devil's in the details.
How long will it take them
to really increase transparency
about who owns what stocks,
and will they go after
some of the big market players that,
might be guilty of market manipulations.
All of this is happening against the upheaval
of tariffs and war.
Fuel prices in Indonesia
are some of the cheapest in the region.
If the president really wants to keep fuel prices low.
He's going to have to pay for it
if oil prices keep rising.
A lot of emerging market currencies have come under pressure,
So if we see continued selling of the rupiah
of its bonds, of its stocks,
it shows that investor interest in some of the
real growth stories in Asia that's waning.
If there's a global loss of trust in Indonesia,
Indonesia becomes more insular.
I don't think anyone in Indonesian government,
Indonesian business wants to see a more insular country.

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Bloomberg Originals

Jun 17, 2026

Historical Context

Current Economic Challenges

Market Integrity Issues

Government Strategy

Mechanisms Behind the Turbulence

Takeaways

Frequently Asked Questions

What are "deep fried stocks" and how do they affect Indonesia’s market?

Who is Bloomberg Originals on YouTube?

Does this page include the full transcript of the video?

Helpful resources related to this video

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