Indonesia's Political and Social Unrest: Navigating Short-Term Volatility and Long-Term Governance Risks

Indonesia, Southeast Asia’s third-largest economy, is at a crossroads. Political and social unrest since 2023 has triggered sharp market volatility, eroded investor confidence, and exposed deep-seated governance risks. While the government’s recent policy reforms and international collaborations offer hope, the path to sustainable growth remains fraught with challenges. This analysis examines the interplay of short-term instability and long-term institutional fragility, offering insights for investors navigating this complex landscape.

Short-Term Volatility: A Market in Turmoil

Indonesia’s political landscape has been roiled by mass protests such as #IndonesiaGelap and #TolakRUUTNI, driven by public discontent over austerity measures, authoritarian policy shifts, and perceived corruption [2]. These movements have directly impacted market stability, with the rupiah hitting its lowest level since the 1998 crisis in 2025 [1]. Foreign direct investment (FDI) has also shifted toward more stable neighbors like Vietnam and Thailand, as investors seek refuge from Indonesia’s inconsistent regulatory environment [3].

The root of this instability lies in the intertwining of military and political elites, abrupt policy reversals, and the erosion of democratic norms. For instance, the controversial revision of the Indonesian National Armed Forces Law and the criminalization of dissent have further alienated both domestic and international stakeholders [2]. In response, investors are pivoting to sectors like technology and renewable energy, perceived as less sensitive to political volatility, while employing currency hedging strategies to mitigate rupiah depreciation [3].

Despite a projected 5% GDP growth for 2025, Indonesia’s economic resilience remains vulnerable to external shocks, including global trade fragmentation and potential U.S. tariff hikes [4]. The immediate challenge for policymakers is to stabilize markets without compromising long-term structural reforms.

Long-Term Governance Risks: Corruption and Institutional Erosion

Beyond short-term turbulence, Indonesia’s governance risks are deeply entrenched. Systemic corruption in state-owned enterprises (SOEs) has been a persistent drag on foreign investment. The 2025 Pertamina scandal, which revealed a $12 billion loss due to fuel fraud, underscored the fragility of anti-graft institutions like the Corruption Eradication Commission (KPK), which has faced political interference and budget cuts since 2019 [5]. The KPK’s internal rot, exemplified by the 2025 detention center extortion case, has further diminished its credibility, shifting responsibility to the less-effective Attorney-General’s Office [5].

Compounding these issues is the lack of transparency in Indonesia’s new sovereign wealth fund, Danantara. Political figures tied to President Prabowo Subianto dominate its leadership, raising fears of regulatory capture and corruption akin to Malaysia’s 1MDB scandal [6]. This environment has led foreign investors to favor private-sector partners like Shell and BP over SOEs, which are perceived as high-risk [5].

While Indonesia’s accession to the OECD Anti-Bribery Convention in 2024 offers a critical opportunity to strengthen anti-corruption measures, progress has been slow. The U.S. Investment Climate Statement for 2024 highlights ongoing challenges, including economic nationalism, trade protectionism, and weak intellectual property enforcement [7]. For Indonesia to attract sustained FDI, it must restore institutional credibility and implement consistent anti-corruption reforms.

International Collaborations: A Path Forward?

Indonesia’s recent policy reforms and international collaborations provide a glimmer of hope. In June 2025, Indonesia submitted its Initial Memorandum to the OECD, marking a key milestone in its accession process and signaling a commitment to align with international anti-corruption standards [8]. By adopting the OECD Anti-Bribery Convention, Indonesia aims to criminalize foreign bribery—a gap in its current legal framework—and enhance transparency [8].

The U.S.-Indonesia Comprehensive Strategic Partnership, elevated in 2023, has also strengthened cooperation in economic and governance reforms [9]. Meanwhile, Indonesia’s membership in BRICS and the New Development Bank is bolstering its geopolitical influence while supporting national projects like green energy transitions [10]. These collaborations reflect Indonesia’s balancing act between global powers and its foreign policy of being “free and active.”

However, the effectiveness of these initiatives hinges on Indonesia’s ability to implement reforms domestically. The ASEAN+3 Macroeconomic Research Office (AMRO) has emphasized the need for stronger policy coordination to sustain economic resilience [11].

Conclusion: A Delicate Balance for Investors

Indonesia’s political and social unrest has created a volatile environment for investors, with short-term market instability and long-term governance risks compounding uncertainty. While the government’s recent reforms and international partnerships offer potential solutions, their success depends on sustained institutional credibility and policy consistency.

For investors, the key to navigating this landscape lies in diversifying sectoral exposure, closely monitoring policy reforms, and managing currency risks. Sectors with clearer governance, such as technology and consumer goods, may offer relative stability. However, the broader economic risks—including a depreciating rupiah and rising public debt—remain significant [4].

Source:
[1] Indonesia's Social Unrest and Policy Missteps: A Looming Risk for Economic Growth and Foreign Investment [https://www.ainvest.com/news/indonesia-social-unrest-policy-missteps-looming-risk-economic-growth-foreign-investment-2508/]
[2] Indonesia's Social Unrest and Policy Missteps: A Looming Risk for Economic Growth and Foreign Investment [https://www.ainvest.com/news/indonesia-social-unrest-policy-missteps-looming-risk-economic-growth-foreign-investment-2508/]
[3] Indonesian Political Instability and Its Impact on Sovereign Risk and Foreign Investment [https://www.ainvest.com/news/indonesian-political-instability-impact-sovereign-risk-foreign-investment-2508/]
[4] Indonesia: Outlook is Strong but Vulnerable to External Shocks [https://economic-research.bnpparibas.com/html/en-US/Indonesia-Outlook-strong-vulnerable-external-shocks-2/11/2025,51313]
[5] Indonesia's Corruption Scandals and Their Impact on Foreign Direct Investment [https://www.ainvest.com/news/indonesia-corruption-scandals-impact-foreign-direct-investment-2508/]
[6] Governance Risks Plague Indonesia's New Sovereign Wealth Fund [https://eastasiaforum.org/2025/04/08/governance-risks-plague-indonesias-new-sovereign-wealth-fund/]
[7] 2024 Investment Climate Statements: Indonesia [https://www.state.gov/reports/2024-investment-climate-statements/indonesia]
[8] Indonesia Could Combat Cross-Border Bribery with OECD Accession [https://eastasiaforum.org/2025/06/05/indonesia-could-combat-cross-border-bribery-with-oecd-accession/]
[9] Joint Statement from the Leaders of the United States and the Republic of Indonesia [https://bidenwhitehouse.archives.gov/briefing-room/statements-releases/2024/11/12/joint-statement-from-the-leaders-of-the-united-states-and-the-republic-of-indonesia-commemorating-75-years-of-diplomatic-relations/]
[10] Bridging National Interest and Global Political Balance [https://sitjournal.com/sitj/article/view/44]
[11] Strengthening Policy Synergy for Indonesia's Stability and Growth [https://amro-asia.org/strengthening-policy-synergy-for-indonesias-stability-and-growth-june-2025/]