Indonesia sharp stock market sell-off is the clearest signal yet of mounting stress in its capital markets, as global investors increasingly sideline Southeast Asia’s largest economy while pouring money into other emerging markets.
The country’s main equity index, the Jakarta Composite, has dropped nearly 12 percent since index provider MSCI warned that Indonesia could face a downgrade to frontier market status over concerns related to ownership rules and trading transparency. The slide has erased more than $80 billion in market value.
Efforts to calm investors — including official pledges of reform and the resignation of five senior figures from the financial regulator and stock exchange — have so far failed to halt the sell-off. A weakening rupiah has added to fears that the problems run deeper than short-term volatility.
Investors Pull Back as Global Capital Looks Elsewhere
Indonesia is losing ground at a time when emerging markets are enjoying a surge of global inflows, driven by falling U.S. interest rates. While currencies and stocks in Latin America — including Peru and Brazil — have rallied sharply, Indonesia has moved in the opposite direction.
Market participants say confidence has been undermined by unease over the economic direction set by President Prabowo Subianto, whose spending plans and governance style are prompting comparisons with earlier periods of state intervention.
Foreign ownership of Indonesia’s bond market has fallen to just over 13 percent, down from almost 40 percent in 2019, according to government data. Equity outflows have also accelerated, reflecting growing caution among international funds.
Policy Shifts Revive Old Fears
Investors worry that policies under Prabowo risk reversing the discipline that Indonesia built after the Asian Financial Crisis, when the rupiah collapsed and the long rule of Suharto — Prabowo’s former father-in-law — came to an end.
Since taking office, Prabowo has expanded military spending and increased the armed forces’ role in government. In the economic sphere, he appointed a close family member to the central bank’s board and dismissed respected finance minister Sri Mulyani Indrawati, a move that rattled markets.
The rupiah fell to a record low of 16,985 per dollar in January, a stark contrast to the strength seen across much of the emerging market universe.
“The warning signs tend to come quietly at first,” said Alan Siow, co-head of emerging markets corporate debt at Ninety One. “Then suddenly you realise how far things have moved. The removal of Sri Mulyani was an early signal.”
Heavy Outflows and Shrinking Fund Exposure
Foreign investors sold nearly 14 trillion rupiah worth of Indonesian shares in 2025, the largest annual outflow since 2020, according to LSEG data. An additional $783 million exited the market in January, while foreign investors sold around $6.4 billion in Indonesian bonds last year.
Research by Copley Fund Research shows a sharp drop in institutional interest. The number of global emerging market funds holding Indonesian equities declined 7.6 percent last year, while those overweight the country fell more than 17 percent — the steepest decline for any single market.
‘Stock Frying’ Undermines Confidence
A key concern in equities is the practice known locally as goreng-goreng saham, or “stock frying,” where coordinated trading between related parties artificially inflates share prices.
Authorities have proposed stricter disclosure rules for major shareholders and plans to double minimum free-float requirements to 15 percent. While investors have welcomed the proposals, they remain sceptical about implementation.
There is also uncertainty over whether the measures will satisfy MSCI, which has already frozen Indonesian securities in some of its indices.
“If companies don’t follow through, we end up right back where we started,” said William Yuen, investment director at Invesco. “Execution is what really matters.”
Fiscal Pressures Raise Bond Market Concerns
In the bond market, investors are watching fiscal policy closely as new spending programmes — including free school meals and higher defence outlays — push Indonesia’s budget deficit toward its legal ceiling.
Although the deficit remains modest by global standards, at 2.92 percent last year it sits uncomfortably close to the statutory limit of 3 percent.
“A lot hinges on how policy is handled in the coming months,” said Johnny Chen, portfolio manager at William Blair. “Markets need reassurance that fiscal discipline and central bank credibility will be preserved.”
Stability Remains, But Momentum Is Fragile
Indonesia still benefits from strong trade surpluses and substantial foreign exchange reserves of $156.5 billion, making a sudden crisis or immediate downgrade unlikely, analysts say.
However, market momentum can shift quickly.
“The orthodoxy Indonesia followed after the Asian Financial Crisis was widely respected,” said Rajeev De Mello, chief investment officer at GAMA Asset Management, who is currently underweight Indonesian assets. “The concern now is that commitment to that framework appears to be weakening.”