Assessing the Impact of Political Unrest on Southeast Asian Markets: Indonesia in Turmoil

Political unrest in Indonesia has emerged as a defining challenge for Southeast Asian markets in 2025, with cascading effects on investor sentiment, currency stability, and foreign direct investment (FDI). The #IndonesiaGelap and #TolakRUUTNI protests, driven by austerity measures, police violence, and institutional distrust, have triggered a 2.27% plunge in the Jakarta Composite Index and a 5.68% annual depreciation of the rupiah against the U.S. dollar [1]. These developments underscore how geopolitical risks—rooted in domestic instability—can rapidly reshape regional capital flows and asset allocations.

Geopolitical Risk and Market Volatility

Indonesia’s Geopolitical Risk Index (GPR) has spiked to 0.11 in July 2025, reflecting heightened concerns over policy reversals and social fragmentation [2]. The government’s abrupt cancellation of a VAT hike and its inconsistent handling of protests have eroded confidence in long-term regulatory predictability [3]. For instance, the termination of the West Kalimantan transmigration program—a cornerstone of rural development—has left investors wary of sudden shifts in economic strategy [3]. Such volatility has prompted a 12.23% year-on-year decline in FDI in Q2 2025, as capital migrates to more stable markets like Vietnam and Thailand [4].

The rupiah’s depreciation to 16,868 per U.S. dollar highlights the Central Bank of Indonesia’s limited capacity to stabilize the currency. With public debt rising to 50% of GDP and inflationary pressures persisting, the government faces a delicate balancing act between populist spending (e.g., expanded electricity subsidies) and fiscal sustainability [5]. This duality has created a "risk-off" environment, where investors prioritize short-term liquidity over long-term growth bets.

Asset Reallocation Strategies

In response to Indonesia’s turmoil, asset managers are adopting three key strategies:
1. Regional Diversification: Investors are shifting capital to Southeast Asian peers with stronger governance frameworks. Vietnam’s stock market, for example, has outperformed Indonesia’s by 4.5% year-to-date, while Thailand’s FDI inflows grew by 8.3% in Q2 2025 [6].
2. Sectoral Hedging: Sectors perceived as less sensitive to political risk—such as technology and renewable energy—are attracting inflows. The Jakarta Technology Index has gained 3.2% in August 2025, despite the broader market’s selloff [7].
3. Currency Hedging: Given the rupiah’s volatility, investors are using forward contracts and dollar-denominated bonds to mitigate exposure. The Indonesian government’s recent issuance of $5 billion in sovereign bonds at 6.25% yields reflects this demand [8].

The Path Forward

For Indonesia to regain investor trust, structural reforms in infrastructure and education are critical. The Daya Anagata Nusantara Investment Management Agency (Danantara) has been tasked with streamlining business permits under Government Regulation No. 28/2025, but progress remains uneven [9]. Meanwhile, the global geopolitical landscape—marked by U.S.-China competition and rising tariffs—adds another layer of complexity to Indonesia’s export-driven economy [10].

Investors must also monitor the interplay between domestic unrest and external shocks. A 1% rise in U.S. tariffs, for instance, could reduce Indonesia’s export revenues by $2.3 billion annually, exacerbating fiscal pressures [11]. In this context, a "wait-and-watch" approach—coupled with dynamic portfolio adjustments—appears prudent.

Source:

[1] Indonesia stocks, rupiah dive as political unrest jolts investors, [https://www.reuters.com/world/asia-pacific/indonesia-stocks-rupiah-dive-political-unrest-jolts-investors-2025-08-29/]
[2] Indonesia’s Social Unrest and Policy Missteps: A Looming Risk to Economic Growth and Foreign Investment, [https://www.ainvest.com/news/indonesia-social-unrest-policy-missteps-looming-risk-economic-growth-foreign-investment-2508/]
[3] 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/]
[4] Foreign investment falls 12.23 percent in Q2 2025 amid rising geopolitical tensions, [https://indonesiabusinesspost.com/4872/corporate-affairs/foreign-investment-falls-12-23-percent-in-q2-2025-amid-rising-geopolitical-tensions]
[5] 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]
[6] Country Risk Report Indonesia, [https://www.allianz.com/en/economic_research/country-and-sector-risk/country-risk/indonesia.html]
[7] Continued Consolidation Called For Indonesia Stock Market, [https://www.nasdaq.com/articles/continued-consolidation-called-indonesia-stock-market]
[8] EMERGING MARKETS-Indonesian rupiah, shares fall as ... [https://sg.finance.yahoo.com/news/emerging-markets-indonesian-rupiah-shares-083611300.html]
[9] Foreign investment falls 12.23 percent in Q2 2025 amid rising geopolitical tensions, [https://indonesiabusinesspost.com/4872/corporate-affairs/foreign-investment-falls-12-23-percent-in-q2-2025-amid-rising-geopolitical-tensions]
[10] Geopolitical Risk Dashboard | BlackRock Investment Institute, [https://www.blackrock.com/corporate/insights/blackrock-institute/interactive-charts/geopolitical-risk-dashboard]
[11] 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]