Political Turmoil in Indonesia and Thailand: Implications for Regional Market Stability and Investor Strategy

Political risk has emerged as a defining catalyst for capital flight and asset repositioning in Southeast Asia, particularly in Indonesia and Thailand. As both nations grapple with domestic instability and external pressures, investors are recalibrating strategies to mitigate exposure while capitalizing on emerging opportunities. This analysis examines how political developments since 2023 have reshaped market dynamics, with a focus on Indonesia’s resilience amid democratic erosion and Thailand’s fragility under constitutional uncertainty.

Indonesia: Resilience Amid Democratic Erosion

Indonesia’s economy has demonstrated remarkable resilience despite political headwinds. In 2024, the country recorded 5.0% GDP growth, driven by robust domestic demand and expansionary fiscal policies, including a 2.3% GDP deficit to fund infrastructure projects [1]. However, the political landscape has grown contentious. The 2022 criminal code overhaul, which criminalized dissent and restricted protest rights, has drawn international criticism and raised concerns about democratic backsliding [5]. These tensions culminated in August 2025, when mass protests erupted over rising living costs and perceived corruption, expanding into broader demands for police reform [4].

Despite these challenges, Indonesia has attracted foreign direct investment (FDI) in strategic sectors. In 2023, FDI inflows reached $47.5 billion, with 23.4% allocated to metal and metal goods, reflecting confidence in the country’s downstreaming policies for nickel and EV battery production [2]. The government’s streamlined OSS licensing system and tax incentives for green energy have further bolstered investor interest [1]. However, structural risks persist: regional disparities, corruption, and global trade tensions—particularly with the U.S. and China—threaten long-term stability [6].

Thailand: Fragility and Capital Flight

Thailand’s political instability has had a more pronounced impact on market confidence. The August 2025 removal of Prime Minister Paetongtarn Shinawatra by the Constitutional Court, triggered by a controversial phone call with Cambodia’s ex-leader, has heightened fears of a military coup [1]. Analysts warn that the Pheu Thai Party’s fragile majority and elite resistance to electoral democracy could lead to snap elections or further constitutional crises [2].

Economically, Thailand’s growth has stagnated. The World Bank revised its 2025 GDP forecast to 1.8%, citing weak domestic demand, U.S. tariffs, and Chinese competition in manufacturing [3]. The SET index plummeted amid political uncertainty, while the Bank of Thailand’s interest rate cuts failed to offset structural weaknesses [3]. FDI inflows, though robust at 43% growth in 2023, are now under threat as investors reassess exposure to a volatile environment [2].

Political risks have also amplified external vulnerabilities. The European Union’s Carbon Border Adjustment Mechanism (CBAM) and Deforestation Regulation (EUDR) disproportionately affect Thailand’s carbon-intensive sectors, such as steel and palm oil [1]. Meanwhile, El Niño-driven droughts have disrupted agricultural output, further straining exports [1]. These factors have prompted asset repositioning, with global funds shifting capital to Thai government bonds over equities [1].

Investor Strategy: Diversification and Sectoral Shifts

Investors in both countries are adopting defensive strategies. In Indonesia, capital is flowing into high-growth sectors like renewable energy and digital infrastructure, supported by government incentives [1]. For example, Bitmain’s planned U.S. factory—a response to geopolitical tensions—reflects a broader trend of “crypto-onshoring” to mitigate supply chain risks [4].

In Thailand, portfolio reallocations are more pronounced. Institutional investors are underweighting equities and overweighting bonds, while foreign manufacturers explore production relocations to Indonesia or Vietnam [1]. The government’s push for green technology and infrastructure faces an uphill battle against political fragmentation, prompting multinational firms to diversify operations [5].

Conclusion: Navigating a Divided Southeast Asia

Indonesia and Thailand exemplify the dual-edged nature of political risk in emerging markets. While Indonesia’s economic fundamentals remain strong, democratic erosion and social unrest pose long-term threats. Thailand’s fragility, meanwhile, has accelerated capital flight and eroded investor confidence. For investors, the key lies in balancing exposure to high-growth sectors with hedging against political volatility.

As the region enters 2025, structural reforms—particularly in governance and economic diversification—will determine whether Southeast Asia’s markets can weather the storm of growing divisions.

Source:
[1] Strengthening Policy Synergy for Indonesia's Stability and Growth, [https://amro-asia.org/strengthening-policy-synergy-for-indonesias-stability-and-growth/]
[2] Investment Outlook, Indonesia 2024, [https://arc-group.com/report/investment-outlook-indonesia-2024/]
[3] Thailand's economy faces pressure amid political turmoil with potential interest rate cut, [https://asianews.network/thailands-economy-faces-pressure-amid-political-turmoil-with-potential-interest-rate-cut/]
[4] Fidelity Asia Fund update - May 2025 | Investment Insights, [https://www.fidelity.com.au/insights/investment-articles/fidelity-asia-fund-update-may-2025/]
[5] BTI 2024 Indonesia Country Report, [https://bti-project.org/en/reports/country-report/IDN]
[6] Indonesia Overview: Development news, research, data, [https://www.worldbank.org/en/country/indonesia/overview]