Assessing Political and Social Risk in Indonesian Markets Amid Protests and Elite Unrest: The Long-Term Impact of Institutional Trust Erosion on Foreign Investment and Policy Stability

The Indonesian market, long a beacon of Southeast Asia’s economic potential, now faces a critical juncture. Political and social unrest, fueled by eroding institutional trust, has disrupted policy stability and raised alarms among foreign investors. From 2023 to 2025, protests under hashtags like #IndonesiaGelap and #TolakRUUTNI have exposed deepening fissures between the public and political elites, with austerity measures, elite privileges, and authoritarian-leaning policies at the center of the crisis [1]. For investors, the question is no longer whether these risks matter, but how they will shape Indonesia’s long-term trajectory.

The Trust Divide: Institutions vs. Elites

Indonesia’s institutional trust landscape is paradoxical. While the President and military enjoy sky-high approval ratings—97.5% and 92.8%, respectively, according to the May 2025 IPO survey [3]—trust in political parties and legislative bodies languishes at 43% and 45.8% [3]. This disparity reflects a public that supports strong leadership but rejects the corruption and cronyism associated with political parties. The government’s decision to cut public works spending by 70% and education funding by 25% to fund populist initiatives like the Free Nutritious Meal (MBG) program further alienated citizens, who viewed these moves as prioritizing short-term populism over long-term development [1].

Elite privileges have compounded the distrust. Revelations that lawmakers received a monthly housing allowance of 50 million rupiah ($3,075)—nearly 10 times the Jakarta minimum wage—sparked August 2025 protests, with demonstrators condemning the “corrupt elites” enriching themselves while ordinary citizens faced inflation and unemployment [2]. Even after the government conceded to cut lawmakers’ perks, analysts warn that without structural reforms, such grievances will persist [4].

Foreign Investment and the Shadow of Instability

The erosion of trust has tangible economic consequences. Indonesia’s rupiah hit 16,868 against the USD in 2025, its weakest since 1998, while public debt rose to 50% of GDP [1]. Foreign direct investment (FDI) has shifted to more stable neighbors like Vietnam and Thailand, where institutional trust and policy predictability remain stronger [1]. A 2025 report by AInvest notes that Indonesia’s political volatility has made investors wary of sectors tied to opaque state entities, such as Pertamina’s $12 billion fuel fraud scandal [1].

Yet, some investors remain cautiously optimistic. The Edelman Trust Barometer 2025 highlights Indonesia’s relatively high trust in business institutions (80%) and the President (76 globally) [2], suggesting that sectors like technology and renewable energy—perceived as less vulnerable to political interference—could still attract capital [1]. However, this optimism hinges on the government’s ability to address systemic issues, including police brutality, military overreach, and the lack of transparency in policymaking [3].

The Path Forward: Rebuilding Trust or Deepening Crisis?

President Prabowo Subianto’s administration faces a dual challenge: restoring public trust while maintaining economic stability. While the government has taken steps to address immediate concerns—such as cutting parliamentary allowances [4]—structural reforms remain elusive. The controversial revision of the Indonesian National Armed Forces Law, which expanded military roles in civilian governance, has drawn comparisons to Suharto’s “dwifungsi” era, raising fears of democratic backsliding [1].

For Indonesia to retain investor confidence, it must tackle the root causes of unrest. This includes strengthening anti-corruption institutions, ensuring transparency in public spending, and curbing the influence of party cartels and oligarchs [5]. Failure to do so risks perpetuating a cycle of protests, economic stagnation, and capital flight.

Conclusion

Indonesia’s political and social risks are no longer abstract. The interplay between institutional trust erosion and elite unrest has already reshaped investor behavior and policy dynamics. While the country’s demographic dividend and natural resources remain attractive, the current trajectory suggests that without meaningful reforms, Indonesia’s market will continue to underperform relative to its neighbors. For investors, the lesson is clear: long-term success in Indonesia will depend not just on economic metrics, but on the government’s ability to rebuild trust in its institutions—and prove that it can govern with both accountability and vision.

Source:
[1] 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/]
[2] Edelman Trust Barometer 2025: Indonesia solidifies ... [https://www.campaignindonesia.id/en/article/edelman-trust-barometer-2025-indonesia-mengukuhkan-posisi-di-tengah-gejolak-global/1903011]
[3] Survey: President and military remain most trusted ... [https://indonesiabusinesspost.com/4419/Politics/survey-president-and-military-remain-most-trusted-indonesian-institutions]
[4] Indonesia accepts protesters' demand to cut lawmakers perks amid unrest [https://www.reuters.com/world/asia-pacific/indonesia-accepts-protesters-demand-cut-lawmakers-perks-amid-unrest-2025-08-31/]