Assessing Political Risk in Indonesian Markets: Prabowo's Shift and Its Impact on Oligarchic Power Structures

Indonesia's political and economic landscape under President Prabowo Subianto has entered a period of profound transformation, marked by centralized governance, military reintegration into civilian administration, and a recalibration of global alliances. These shifts, while ambitious in their vision for national sovereignty and industrial growth, have introduced significant political and economic risks for investors. The interplay between Prabowo's consolidation of power and the erosion of institutional checks and balances raises critical questions about Indonesia's long-term investment resilience and the sustainability of its oligarchic power structures.

Centralization of Power and Military Influence

Prabowo's administration has rapidly centralized authority, exemplified by the appointment of military officers to civilian governance roles and the expansion of the armed forces' involvement in social programs. The recent cabinet reshuffles—replacing key figures like Finance Minister Sri Mulyani Indrawati and promoting retired general Djamari Chaniago to Coordinating Minister for Political and Security Affairs—underscore this trendIndonesian President Prabowo replaces five ministers after deadly protests^[1]. Such moves echo the Suharto-era model of military-civil fusion, raising concerns about democratic backsliding and the entrenchment of a “deep state” apparatusPrabowo’s tightrope walk to 2029^[2].

The establishment of the Danantara Sovereign Wealth Fund, with over $900 billion in state-owned enterprise assets under direct presidential control, further consolidates economic powerIndonesia launches sovereign wealth fund to manage^[3]. While the fund aims to attract foreign investment and drive industrialization, its opaque governance structure—lacking independent oversight—has drawn criticism from analysts and investors. According to a report by The Diplomat, the fund's reliance on a small circle of Ivy League-educated technocrats risks replicating the patronage networks of Indonesia's past, potentially exacerbating corruption and inefficiencyIn Indonesia, President Prabowo’s ‘Ivy League Mafia’ echoes the past^[4].

Economic Policies and Investment Risks

Prabowo's economic agenda, centered on downstreaming raw materials and expanding social spending, presents a dual-edged sword. The $40 billion downstreaming plan for 2025, targeting sectors like nickel, copper, and oil refining, aims to reduce reliance on global supply chains and boost domestic value additionPresident approves US$40 billion downstreaming plan to boost energy, mining sectors^[5]. However, these policies clash with U.S. and EU trade frameworks, such as the Inflation Reduction Act, which prioritize domestic or allied suppliersIndonesia’s Probable Foreign Policy Shift from the West under a Prabowo Administration^[6]. For instance, Apple's recent dispute with Indonesian regulators over local content requirements for iPhone 16 sales highlights the friction between Prabowo's protectionist ambitions and multinational corporations' operational flexibilityIndonesia must abandon protectionism to achieve industrial growth^[7].

Simultaneously, the administration's populist spending initiatives—such as a $28 billion universal school lunch program—have come at the expense of critical public services. Budget cuts to higher education (-39%), healthcare (-18.5%), and infrastructure (-73%) have sparked public protests and raised concerns about long-term development sustainabilityPrabowo Subianto is drastically cutting Indonesia’s budget^[8]. As noted by The Economist, these fiscal reallocations risk undermining Indonesia's human capital and institutional resilience, particularly as the country grapples with global economic headwinds like U.S. tariff threats and declining Chinese demand for raw materialsPrabowo faces investor revolt over Indonesia’s economic path^[9].

Geopolitical Realignments and Foreign Policy Shifts

Prabowo's foreign policy pivot toward China and ASEAN, coupled with a distancing from Western alliances, has further complicated Indonesia's investment environment. The administration's willingness to engage with Chinese projects in the South China Sea—despite historical reluctance to challenge Beijing's territorial claims—signals a pragmatic, albeit controversial, recalibrationIndonesia’s Geopolitical Position in the Prabowo Era: Between ASEAN and Emerging Global Powers^[10]. This shift aligns with broader trends among Indonesian elites seeking to diversify partnerships beyond traditional Western powers, but it also exposes the country to geopolitical risks, including dependency on Chinese capital and technology.

The decision to join BRICS and prioritize non-alignment has added another layer of uncertainty. While these moves aim to enhance economic sovereignty, they risk isolating Indonesia from Western-led trade and financial systems. For example, the U.S. Inflation Reduction Act's restrictions on electric vehicle supply chains have already limited Indonesia's access to key markets for nickel-based battery componentsIndonesia’s Future: Political, Economic, and Foreign Policy Challenges under Prabowo^[11]. Investors must now weigh the potential benefits of closer ties with China against the risks of overexposure to a single trading partner and the volatility of global geopolitical tensions.

Stakeholder Reactions and Sector-Specific Challenges

Stakeholder reactions to Prabowo's policies have been polarized. Domestic nationalist technocrats and Islamic conservatives largely support the administration's focus on economic self-reliance and social welfare, while civil society groups and opposition parties decry the erosion of democratic norms and fiscal transparencyPrabowo’s Indonesia: Inheriting Democracy at Dusk^[12]. Internationally, foreign investors remain cautious. The sudden stock market drop in March 2025, triggered by rumors of Finance Minister Sri Mulyani's potential resignation, exemplifies the fragility of investor confidence under Prabowo's tenurePrabowo’s Policy Landscape and Investment Outlook^[13].

Sector-specific risks are particularly pronounced in mining, energy, and manufacturing. The government's downstreaming policies, while promising for domestic processing industries, have strained relations with trading partners and introduced regulatory uncertainty. For example, foreign exchange controls requiring exporters to retain earnings domestically have raised operational costs for multinational corporations in extractive sectorsIndonesia Under Prabowo Subianto: Outlook for Global Businesses^[14]. Meanwhile, Prabowo's ambitious but vague energy transition plans—such as phasing out coal within 15 years—lack clear implementation strategies, deterring investors seeking regulatory clarityPrabowo inherits the unfinished business of …^[15].

Conclusion: Navigating the Tightrope

Prabowo Subianto's leadership represents a high-stakes experiment in balancing centralized governance with economic resilience. While his policies aim to address inequality, boost industrial growth, and assert geopolitical independence, they also risk deepening institutional fragility and investor skepticism. For foreign investors, the key challenge lies in navigating the tension between short-term opportunities in infrastructure and processing industries and the long-term risks of governance instability, fiscal mismanagement, and geopolitical volatility.

As Indonesia's political and economic trajectory unfolds, stakeholders must remain vigilant to the evolving interplay between Prabowo's vision for national sovereignty and the realities of a globalized economy. The coming years will test whether the administration can reconcile its ambitions with the demands of democratic governance and sustainable development—or whether it will further entrench a system where oligarchic power and political risk dominate the investment landscape.