Assessing Political Unrest in Indonesia: Implications for Emerging Market Portfolios

Political instability in Indonesia has emerged as a critical risk factor for emerging market investors, particularly in Southeast Asia. The August 2025 protests, fueled by economic grievances and a fatal police incident, have exposed vulnerabilities in Indonesia’s governance and social cohesion. For asset allocators, the crisis underscores the need to reevaluate exposure to the region, balancing short-term volatility with long-term structural risks.

Catalysts of Unrest: Economic Grievances and Institutional Erosion

The immediate trigger for the protests was the death of 21-year-old delivery driver Affan Kurniawan, struck by a police vehicle during demonstrations in Jakarta [2]. However, deeper causes lie in public frustration over economic inequality and perceived elite privilege. Reports that lawmakers received a $3,000 monthly housing allowance—far exceeding the minimum wage—sparked outrage in a country where 10% of the population lives below the poverty line [2]. According to a report by the Center for Strategic and International Studies (CSIS), austerity measures and corruption have eroded trust in institutions, with civil groups framing the protests under the hashtag #IndonesiaGelap (dark Indonesia) [3].

Government Response and Escalation

President Prabowo Subianto’s administration initially responded with force, deploying military units to quell the unrest and labeling protesters as “terrorists” [4]. This approach backfired, escalating violence that spread to cities like Makassar and Surabaya. By September 2025, at least seven people had died, and economic losses in Jakarta alone reached 55 billion rupiah ($3.3 million) due to damaged infrastructure and disrupted business activity [2]. While the government suspended the controversial housing allowance and announced an investigation into Kurniawan’s death, analysts warn these measures address symptoms, not root causes [6].

Economic and Market Impacts

The unrest has already triggered market turbulence. The Jakarta Composite Index (JCI) fell more than 2% intraday, while the rupiah weakened by nearly 1% as investors fled to safer assets [5]. Data from Brights Research indicates that the Retailers and Shopping Center Association (HIPPINDO) has raised concerns about the sustainability of essential services, with business closures compounding economic strain [5]. For emerging market portfolios, these developments highlight the fragility of Indonesia’s economic recovery, particularly in sectors reliant on consumer spending and foreign capital inflows.

Implications for Emerging Market Portfolios

1. Geopolitical Risk Premiums: Indonesia’s crisis adds to Southeast Asia’s risk profile, with investors likely to demand higher returns for exposure to the region. Historical data from the MSCI Emerging Markets Index shows that prolonged political instability can reduce portfolio returns by 8–12% annually [6].
2. Sectoral Vulnerabilities: Sectors such as retail, real estate, and tourism face direct exposure to unrest. Conversely, defensive assets like government bonds or utilities may see inflows, though liquidity risks persist.
3. Diversification Strategies: Investors should consider hedging against currency volatility (e.g., rupiah depreciation) and rebalancing portfolios toward more stable emerging markets like Vietnam or Thailand, where governance reforms are progressing.

Strategic Asset Allocation in Southeast Asia

The Indonesian crisis underscores the importance of dynamic asset allocation. For Southeast Asia, where political risks are rising due to populist policies and social inequality, investors should:
- Cap Exposure: Limit equity allocations in Indonesia to 5–7% of emerging market portfolios until stability is restored.
- Monitor Early Warning Indicators: Track social media sentiment, protest frequency, and policy reversals (e.g., the housing allowance suspension) as proxies for institutional credibility.
- Engage in ESG Analysis: Prioritize companies with strong corporate governance and community engagement, which may be better insulated from reputational and operational risks.

Conclusion

The August 2025 protests in Indonesia are a stark reminder of how economic grievances and institutional failures can rapidly destabilize even the largest economies in Southeast Asia. For emerging market investors, the crisis demands a recalibration of risk assessments, with a focus on geopolitical resilience and adaptive portfolio strategies. While Indonesia’s long-term growth potential remains intact, the current turmoil highlights the need for caution and agility in navigating Southeast Asia’s evolving risk landscape.

Source:
[1] Indonesia in chaos: Five Indonesians give views on why ... [https://www.aljazeera.com/news/2025/9/5/indonesia-in-chaos-five-indonesians-give-views-on-why-and-how-to-fix]
[2] What to know about Indonesia's deadly nationwide unrest ... [https://www.pbs.org/newshour/world/what-to-know-about-indonesias-deadly-nationwide-unrest-over-lawmakers-perks]
[3] Indonesia Protests Amid Economic Anxieties and Police ... [https://www.csis.org/analysis/indonesia-protests-amid-economic-anxieties-and-police-violence]
[4] August 2025 Indonesian protests [https://en.wikipedia.org/wiki/August_2025_Indonesian_protests]
[5] Macro Strategy: Restoring Stability [https://www.brights.id/en/research-and-news/research-report/macro-strategy-restoring-stability]
[6] The cost of erosion of public trust in government - Academia [https://www.thejakartapost.com/opinion/2025/09/03/the-cost-of-erosion-of-public-trust-in-government.html]