Indonesian Political Instability and Its Impact on Sovereign Risk and Foreign Investment

The recent wave of violent protests in Indonesia, sparked by the fatal police incident involving Affan Kurniawan in August 2025, has laid bare the fragility of the country’s political and economic stability. While Indonesia’s sovereign credit ratings remain technically stable—S&P Global Ratings, Moody’s, and Fitch all maintain their “BBB” or “Baa2” assessments—the underlying risks to investor confidence and capital flows are mounting. The protests, driven by a toxic mix of economic grievances and institutional distrust, have exposed vulnerabilities in governance that could erode Indonesia’s hard-won investment-grade status over the medium term.

The Immediate Fallout: Currency Volatility and Capital Flight

The rupiah’s depreciation to 16,868 against the U.S. dollar, its lowest level since the 1998 financial crisis, underscores the market’s anxiety [1]. This sharp decline reflects not only the immediate shock of the protests but also deeper concerns about fiscal discipline. The government’s inconsistent regulatory decisions—such as abrupt reversals in infrastructure and education policies—have created a climate of unpredictability, deterring long-term foreign direct investment (FDI) [2]. Investors are increasingly favoring Southeast Asian peers like Vietnam and Thailand, where policy continuity and democratic resilience appear stronger [3].

Credit Ratings: A Delicate Balancing Act

Despite the turmoil, major credit rating agencies have so far refrained from downgrading Indonesia. S&P and Fitch cite the country’s 5% GDP growth projections and relatively low public debt-to-GDP ratio as stabilizing factors [1]. Moody’s similarly highlights Indonesia’s stable commodity exports and domestic consumption as growth drivers [3]. However, these assessments hinge on the assumption that fiscal discipline will be maintained. The government’s recent expansionary measures—such as the controversial housing allowance for parliamentarians—signal a dangerous shift toward populist spending, which could widen fiscal deficits and strain public finances [2].

Governance Challenges and Democratic Erosion

The protests have also amplified concerns about democratic backsliding. The Prabowo Subianto administration’s revision of the Armed Forces Law and its use of anti-defamation laws to suppress dissent have drawn international criticism [2]. These actions, coupled with the perceived lack of accountability for police violence, risk alienating foreign investors who prioritize stable institutions. The erosion of civil liberties and judicial independence further complicates Indonesia’s appeal as a destination for capital [3].

Investor Strategy: Hedging and Sectoral Shifts

In response to the heightened risks, investors are recalibrating their strategies. Within Indonesia, capital is flowing into sectors perceived as less sensitive to political volatility, such as technology and renewable energy [2]. However, these sectors remain small relative to the broader economy, limiting their capacity to offset losses in more vulnerable areas like manufacturing and infrastructure. Currency hedging has also become a priority, with many investors using derivatives to mitigate exposure to the rupiah’s instability [1].

Conclusion: A Tenuous Equilibrium

Indonesia’s current credit profile reflects a precarious balance between economic resilience and political fragility. While the government’s growth projections and commodity exports provide a buffer, the August 2025 protests have exposed systemic weaknesses in governance and fiscal management. For foreign investors, the path forward requires a nuanced approach: diversifying across sectors and regions while closely monitoring policy reforms that could signal a return to stability. The coming months will test whether Indonesia can reconcile its democratic ideals with the demands of economic governance—or whether the cracks in its political foundation will widen into a full-blown crisis.

Source:
[1] Indonesian Political Unrest and Its Impact on Sovereign Risk and Market Stability [https://www.ainvest.com/news/indonesian-political-unrest-impact-sovereign-risk-market-stability-2508/]
[2] Why are antigovernment protests taking place in Indonesia [https://www.aljazeera.com/news/2025/8/29/why-are-antigovernment-protests-taking-place-in-indonesia]
[3] S&P maintains Indonesia's credit rating at BBB – still safe? [https://www.idnfinancials.com/news/56249/sp-maintains-indonesias-credit-rating-at-bbb-still-safe]