Political Turbulence and Market Vulnerability: Reassessing Indonesia’s Attractiveness for Foreign Investors

Indonesia’s political landscape in 2025 has become a focal point for global investors, as escalating protests, policy reversals, and institutional erosion have reshaped the country’s risk profile. The #IndonesiaGelap and #TolakRUUTNI movements, driven by austerity measures, military law revisions, and perceived democratic backsliding, have triggered a 12.23% year-on-year decline in foreign direct investment (FDI) in Q2 2025 [1]. This decline, coupled with a 5.68% depreciation of the rupiah against the U.S. dollar, underscores a sharp recalibration of Indonesia’s attractiveness to foreign capital [2].

The equity risk premium (ERP) in Indonesia has widened significantly, reflecting heightened uncertainty. Analysts note that political turbulence has elevated ERP by 120–150 basis points, as investors demand greater returns to offset volatility in policy signals and governance [3]. For instance, the abrupt cancellation of a VAT hike and inconsistent regulatory actions—such as the Danantara sovereign wealth fund’s opaque oversight—have eroded long-term predictability [4]. These developments align with broader trends: global geopolitical risks, including U.S.-China tensions and Middle East conflicts, have amplified capital flight from emerging markets, with Indonesia’s five-year credit default swap (CDS) premium peaking at 97.18 basis points in May 2025 [5].

Investor behavior has shifted in response. Capital outflows reached Rp602 trillion in March 2025, with ultra-high-net-worth individuals reallocating assets to gold, cryptocurrency, and stablecoins like USDT [6]. Meanwhile, foreign investors are diversifying regionally, favoring Vietnam and Thailand’s more stable environments [7]. Within Indonesia, sectoral hedging is evident: technology and renewables have attracted inflows, while traditional sectors like manufacturing face headwinds due to stalled factory investments and operational disruptions [8].

The government’s attempts to stabilize the economy have had mixed results. While infrastructure projects in Nusantara and tax incentives for foreign firms remain appealing, inconsistent policy execution—such as the sudden withdrawal of a university mining permit proposal—has undermined credibility [9]. Additionally, U.S. tariff threats loom large, with a 1% increase potentially reducing Indonesia’s export revenues by $2.3 billion annually [10].

For foreign investors, the calculus is clear: Indonesia’s long-term growth potential remains intact, but near-term risks demand caution. Structural reforms, transparency in governance, and consistent policy frameworks are critical to restoring confidence. Until then, the equity risk premium will remain elevated, and capital will continue to seek safer havens.

Source:
[1] Indonesia's investment dynamics: Preventing capital outflow [https://www.pwc.com/id/en/media-centre/infrastructure-news/may-2025/indonesia-investment-dynamics-preventing-capital-outflow.html]
[2] Assessing the Impact of Political Unrest on Southeast Asian Markets: Indonesia’s Turmoil [https://www.ainvest.com/news/assessing-impact-political-unrest-southeast-asian-markets-indonesia-turmoil-2508/]
[3] Indonesia, Thai Stock Market Outlooks Buffeted by Political Risk [https://www.livemint.com/market/stock-market-news/indonesia-thai-stock-market-outlooks-buffeted-by-political-risk-11756629668618.html]
[4] Indonesian Political Unrest and Its Impact on Sovereign Risk and Market Stability [https://www.ainvest.com/news/indonesian-political-unrest-impact-sovereign-risk-market-stability-2508/]
[5] Geopolitical Risk Dashboard | BlackRock Investment Institute [https://www.blackrock.com/corporate/insights/blackrock-institute/interactive-charts/geopolitical-risk-dashboard]
[6] Indonesia's investment dynamics: Preventing capital outflow [https://www.pwc.com/id/en/media-centre/infrastructure-news/may-2025/indonesia-investment-dynamics-preventing-capital-outflow.html]
[7] Indonesian Political Unrest and Its Impact on Sovereign Risk and Market Stability [https://www.ainvest.com/news/indonesian-political-unrest-impact-sovereign-risk-market-stability-2508/]
[8] Indonesia's Social Unrest and Policy Missteps: A Looming Risk for Economic Growth and Foreign Investment [https://www.ainvest.com/news/indonesia-social-unrest-policy-missteps-looming-risk-economic-growth-foreign-investment-2508/]
[9] 2025 Indonesian protests [https://en.wikipedia.org/wiki/2025_Indonesian_protests]
[10] Indonesia: Outlook is Strong but Vulnerable to External Shocks [https://economic-research.bnpparibas.com/html/en-US/Indonesia-Outlook-strong-vulnerable-external-shocks-2/11/2025,51313]