Indonesia's Political Reforms and Market Implications: Assessing Stability and Investor Confidence

Indonesia’s political landscape has undergone significant turbulence since 2023, with reforms and governance challenges shaping investor sentiment and market dynamics. The country’s accession to the OECD in 2024 and its adoption of the OECD Anti-Bribery Convention marked a pivotal step toward institutional credibility, yet systemic corruption and democratic backsliding continue to undermine confidence. The Pertamina fuel fraud scandal, which exposed a $12 billion loss in state-owned enterprises (SOEs), exemplifies the fragility of Indonesia’s governance framework [1]. Meanwhile, the opaque structure of the newly established sovereign wealth fund, Danantara, has raised fears of regulatory capture, further deterring foreign capital [1].

The rupiah’s depreciation to levels not seen since the 1998 crisis in early 2025 underscores the economic fallout from political instability. Foreign investors, wary of prolonged unrest and inconsistent policy implementation, have redirected capital to more stable Southeast Asian markets like Vietnam and Thailand [4]. This shift is compounded by Indonesia’s weakened anti-graft institution, the Corruption Eradication Commission (KPK), which has faced political interference and budget cuts, eroding trust in anti-corruption efforts [2].

Despite these challenges, Indonesia’s OECD accession and U.S.-Indonesia Comprehensive Strategic Partnership signal a commitment to governance reforms. The OECD Economic Outlook projects steady GDP growth of 5.1% in 2024 and 5.2% in 2025, driven by private consumption and investment [1]. However, the success of these reforms hinges on domestic implementation. For instance, while the OECD Anti-Bribery Convention aims to criminalize foreign bribery—a gap in Indonesia’s legal framework—its effectiveness remains untested [4]. Similarly, the U.S. Investment Climate Statement highlights persistent issues like economic nationalism and weak intellectual property enforcement, which could deter long-term FDI [5].

Equity markets have mirrored this uncertainty. In late 2023, foreign investors withdrew IDR 8 trillion from the equity market and IDR 14 trillion from the bond market, reflecting shifting sentiment amid political and economic volatility [3]. The Jakarta Composite Index (JCI) has since shown resilience, buoyed by private-sector growth in technology and renewables, but remains vulnerable to external shocks such as U.S. tariff hikes or global trade fragmentation [4].

For investors, the path forward requires a nuanced approach. Sectors with private-sector dominance, such as technology and consumer goods, offer relative stability compared to SOE-heavy industries like oil and gas [1]. Currency hedging strategies and diversification across Southeast Asian markets are also critical to mitigate rupiah depreciation risks. While Indonesia’s long-term economic vision—aiming for high-income status by 2045—relies on structural reforms to boost productivity and global competitiveness [3], the immediate outlook remains clouded by governance risks and democratic erosion under Prabowo Subianto’s leadership [4].

In conclusion, Indonesia’s political reforms present a mixed picture for investors. The OECD accession and international partnerships offer a framework for improved governance, but their impact on equity and FX markets will depend on sustained institutional reforms and policy consistency. For now, cautious optimism prevails, with investors balancing Indonesia’s growth potential against its persistent political and economic vulnerabilities.

Source:
[1] Indonesia's Political and Social Unrest: Navigating Short ... [https://www.ainvest.com/news/indonesia-political-social-unrest-navigating-short-term-volatility-long-term-governance-risks-2508/]
[2] Indonesia's Corruption Scandals and Their Impact on Foreign Direct Investment [https://www.ainvest.com/news/indonesia-corruption-scandals-impact-foreign-direct-investment-2508/]
[3] OECD Economic Surveys: Indonesia 2024 [https://www.oecd.org/en/publications/2024/11/oecd-economic-surveys-indonesia-2024_e3ab8960.html]
[4] 2024 Investment Climate Statements: Indonesia [https://www.state.gov/reports/2024-investment-climate-statements/indonesia]
[5] Indonesia could combat cross-border bribery with OECD accession [https://eastasiaforum.org/2025/06/05/indonesia-could-combat-cross-border-bribery-with-oecd-accession/]