Assessing Political and Social Risk in Indonesian Equities Amid Escalating Unrest

The Indonesian equity market has long been a barometer of Southeast Asia’s economic dynamism, but recent developments in 2025 have exposed vulnerabilities that demand a recalibration of risk assessments. Political and social unrest, fueled by public frustration over corruption, austerity measures, and governance failures, has triggered sharp market corrections and currency depreciation. The Jakarta Composite Index (IHSG) plummeted by 2.4% on August 29, 2025, as protests turned violent following the fatal incident involving a motorcycle driver killed by police [2]. The rupiah, meanwhile, hit a 25-year low of 16,495 per U.S. dollar, reflecting eroded investor confidence and systemic governance risks [5]. These events underscore a critical question: How resilient is Indonesia’s equity market to political volatility, and what lessons from history can guide investors?

Geopolitical Volatility and Market Fragility

Indonesia’s current crisis is rooted in a confluence of domestic and global factors. Domestically, systemic corruption in state-owned enterprises—exemplified by the Pertamina $12 billion fraud—and opaque governance in the Danantara sovereign wealth fund have deepened public distrust [1]. The proposed revision of the Indonesian National Armed Forces Law further inflamed tensions, with critics arguing it erodes civilian oversight [4]. Globally, trade fragmentation and U.S. tariff threats have compounded vulnerabilities, making Indonesia’s export-dependent economy susceptible to external shocks [3].

The government’s response has been perceived as inadequate. Advising lawmakers to work from home during the August 2025 protests, for instance, was interpreted as a disconnect from public grievances [4]. Such missteps have accelerated capital flight, with foreign direct investment (FDI) shifting to politically stable neighbors like Vietnam and Thailand [1]. Institutional credibility, already strained by inconsistent policy reforms, now faces a test of its resilience.

Historical Resilience: Lessons from the 1997–1998 Crisis

To contextualize current risks, it is instructive to examine Indonesia’s recovery from the 1997–1998 Asian Financial Crisis. During that period, the rupiah lost 85% of its value, GDP contracted by 13.1%, and the banking sector collapsed [1]. Political instability, including Suharto’s resignation, delayed recovery efforts. However, structural reforms—such as tariff reductions and IMF-supported fiscal policies—eventually stabilized the economy, enabling a gradual rebound by the late 1990s [2].

The 2025 crisis, while severe, appears less systemic than its 1990s counterpart. Indonesia’s GDP growth remains projected at 4.9% in 2025, supported by domestic consumption and easing inflation [3]. The government’s focus on deregulation and housing sector reforms—aimed at creating 3 million annual housing units—also signals a commitment to inclusive growth [3]. Yet, structural challenges persist: premature deindustrialization, poor human capital, and reliance on raw commodity exports threaten long-term resilience [5].

Navigating the Path Forward

Investors must weigh short-term volatility against long-term fundamentals. Sectors like technology and renewable energy, less sensitive to political instability, have attracted capital hedging against rupiah depreciation [1]. However, systemic risks—such as regulatory capture and corruption—remain unaddressed. The OECD Anti-Bribery Convention accession in 2024 and BRICS membership offer symbolic progress, but institutional credibility hinges on consistent reforms [1].

Conclusion

Indonesia’s equity market has demonstrated historical resilience, but the 2025 unrest highlights the fragility of its current trajectory. While structural reforms and GDP growth provide a foundation for recovery, political instability and governance gaps remain critical risks. Investors should prioritize sectors with lower political exposure and monitor policy consistency. For Indonesia, the path to market resilience will require not just crisis management, but a recommitment to transparent governance and inclusive economic strategies.

Source:
[1] Indonesia's Political and Social Unrest: Navigating Short-Term Volatility and Long-Term Governance Risks [https://www.ainvest.com/news/indonesia-political-social-unrest-navigating-short-term-volatility-long-term-governance-risks-2508/]
[2] WTO | Trade policy review - Indonesia 1998 [https://www.wto.org/english/tratop_e/tpr_e/tp094_e.htm]
[3] Indonesia's Economy Remains Resilient Despite Global Headwinds [https://www.worldbank.org/en/news/press-release/2025/06/23/indonesia-economy-remains-resilient-despite-global-headwinds]
[4] Jakarta Protests Send Indonesian Stocks Down 1.7% Amid Investor Jitters [https://jakartaglobe.id/business/jakarta-protests-send-indonesian-stocks-down-17-amid-investor-jitters]
[5] Will Indonesia Fall Amidst the Global Economy Crisis? [https://uinjkt.ac.id/en/will-indonesia-fall-amidst-the-global-economy-crisis]