Indonesia 2026, how a growth economy is losing its own stock market

The short version

The Jakarta Composite Index has lost more than 32 percent so far this year, the weakest of the 90 equity indices tracked by Bloomberg. It has fallen in every single month and is heading for its largest annual loss since 2008.

The rupiah hit a record low of 18,190 per US dollar in early June. By then foreign funds had pulled 3.9 billion dollars out of local shares and 597 million dollars out of bonds.

What stands out is the contrast with the economy. Growth in 2025 was the best in three years, and most analysts expect around five percent for both 2026 and 2027. The crisis is in the capital market, not in the real economy.

What happened in the market

The steadiness of the decline says more than its size. A market that falls in every single month is not reacting to one event but to a continuing development.

Behind it sits a self reinforcing loop. Foreign investors sell and convert the proceeds back into their home currency. That pushes the rupiah down, deepens the losses of the investors who remain and triggers further selling.

The political cause

The trigger lies in political decisions rather than in economic conditions. The abrupt dismissal of the long serving finance minister, a widening budget deficit and the appointment of a nephew of the president to the central bank set off capital outflows.

Parliament then passed a law that effectively removes the independence of the central bank. Politicians can now issue binding recommendations and remove governors early. Once that independence goes, investors expect higher inflation and demand compensation for it.

Index rules and transparency

In July S&P Dow Jones Indices placed the country on the watch list for a possible downgrade from emerging market to frontier market, citing shortcomings in transparency. The benchmark index fell 1.5 percent in response. That classification decides which funds may invest, and index tracking products sell automatically.

How concrete the problem is became clear in spring. A petrochemical group reached a market value of around 40 billion dollars at the end of 2024. Five shareholder groups controlled close to 90 percent of the shares, with only about 11 percent in free float. Since a reform in early 2026 holders must disclose a position from one percent. In mid May MSCI removed the company and five others from the Global Standard Index.

State fund, rates and the real economy

At the centre of the debate is a state fund founded in 2025. The government uses it to pool the investments of state owned groups. Economists instead classify the planned use of the fund to work around the three percent deficit ceiling as dangerous shadow debt. The main cost driver cited is the new capital on Borneo, estimated at 35 billion dollars.

The central bank has raised its policy rate by 100 basis points since May. Inflation eased to 2.88 percent in July, so rates are rising not because of prices but to defend the currency. That is the dilemma, because higher rates slow the growth the government wants to accelerate.

The real economy remains separate for now. A stimulus package worth 965 million dollars, with rice handed out to 18.3 million households, supported consumption, and direct investment keeps arriving. Portfolio capital disappears in weeks, a factory cannot be withdrawn at short notice.

Frequently asked questions

How far has the Jakarta market fallen

The benchmark index lost more than 32 percent by early June 2026, the weakest of the 90 indices tracked by Bloomberg. It fell in every month of the year and is heading for its largest annual loss since 2008.

How low is the rupiah

In early June it hit a record low of 18,190 rupiah per US dollar. By early July it had lost 7.4 percent since the start of the year, the steepest fall of any Asian currency.

What are the causes

Mainly political ones. Reports point to the dismissal of the finance minister, a widening budget deficit, the appointment of a presidential nephew to the central bank and a law that effectively removes central bank independence.

Is the economy still growing

Yes. Growth in 2025 was the best in three years, and most analysts expect around five percent for both 2026 and 2027. Direct investment keeps flowing in while short term investment capital leaves.

This analysis is for information only and is not investment advice.