Indonesia's Military Expansion: A Policy Risk Catalyst for Investors

The Indonesian government's recent amendments to its military laws, granting expanded roles for the armed forces in civilian governance and economic sectors, have sent shockwaves through global investor circles. This strategic shift, spearheaded by President Prabowo Subianto, marks a dramatic reversal of post-authoritarian reforms and poses significant risks to investor confidence. As active-duty military officers now occupy critical positions in state-owned enterprises (SOEs), infrastructure projects, and natural resource management, the lines between civilian governance and military influence are rapidly dissolving. For investors, this represents both a warning and an opportunity to reassess exposures to Indonesia's economy.

The Policy Shift: Militarizing the Economy

The March 2025 revision of Indonesia's TNI Law allows active-duty military personnel to hold roles in 15 civilian institutions, including key economic sectors like infrastructure development and SOE management. This directly revives the Suharto-era dwifungsi doctrine, embedding the military into governance structures once reserved for civilian experts. Notable appointments include:
- General Novi Helmy Prasetya as CEO of Bulog (state logistics agency), overseeing food distribution networks.
- Walmildan Tsani Panjaitan as CEO of Garuda Indonesia, a flag carrier critical to tourism and trade.
- Simon Aloysius Mantiri leading Pertamina, Indonesia's oil giant, amid rising global energy demand.

These moves, justified as responses to geopolitical threats, have been condemned by civil society and international watchdogs for eroding democratic accountability. The rushed legislative process—conducted in secret sessions—has amplified fears of authoritarian overreach.

Investment Risks: Why This Matters to Portfolios

1. Policy Uncertainty and Governance Erosion
   Military dominance in economic sectors introduces unpredictability. Investors face heightened risks of arbitrary decision-making in projects like the Merauke Food Estate (a controversial agricultural initiative in Papua) or infrastructure bids dominated by military-linked firms.

2. Social Unrest and Geopolitical Tensions
   Protests by students and pro-democracy groups have already disrupted urban centers. Meanwhile, military modernization (e.g., $10.6B defense budget for Rafale fighters and Scorpene submarines) may divert funds from infrastructure critical to long-term growth.

3. Corruption and Mismanagement
   The military's lack of civilian sector expertise has led to failures like the Central Kalimantan Food Estate, which wasted $400M without meeting production targets. SOEs under military leadership, such as Pertamina, may prioritize political loyalty over operational efficiency.

Investment Implications: Navigating the Risks

While the militarization trend poses clear headwinds, investors can adopt strategies to mitigate exposure and capitalize on sector-specific opportunities:

Avoid High-Risk Sectors

• State-Owned Enterprises: Bulog, Garuda, and Pertamina face governance risks and operational inefficiencies.
• Natural Resource Plays: Forestry and mining projects in contested regions like Papua carry elevated ESG and compliance risks.

Focus on Transparent, Export-Driven Sectors

• Technology and Manufacturing: Companies like GoTo Group (e-commerce) or Indofood (consumer goods) may benefit from domestic demand growth, provided they avoid military-linked supply chains.
• Infrastructure PPPs: Public-private partnerships in ports or renewable energy could offer stability if contracts are legally robust and civilian-led.

Monitor Geopolitical Leverage Points

• Defense Sector Opportunities: Firms supplying military hardware (e.g., PT Pindad for armored vehicles) may see short-term gains, but long-term sustainability depends on transparency reforms.

Conclusion: A Crossroads for Democracy and Capital

Indonesia's military expansion is a stark reminder that policy risks can outpace economic fundamentals. While the government claims these changes enhance national security, the erosion of democratic safeguards and the militarization of SOEs threaten investor confidence in the long term.

Immediate Action for Investors:
1. Reduce Exposure: Trim holdings in SOEs and sectors directly tied to military influence.
2. Engage in ESG Due Diligence: Scrutinize supply chains and governance structures for links to military entities.
3. Track Political Signals: Monitor protests, parliamentary votes on further military legislation, and shifts in Indonesia's credit ratings (currently BBB- by S&P).

The path forward hinges on whether Prabowo's administration can balance security imperatives with democratic governance—or whether investors must brace for a prolonged period of uncertainty. The time to act is now.