While the countries of Southeast Asia were among the big winners from the reconfiguration of global trade that took place during Trump’s first term, their trade surpluses have ballooned, raising fears that they could become the target of new measures.
Adding to this uncertainty is the DeepSeek effect, which has diverted some investment to Chinese markets, largely shunned for months. Chinese equity markets have already attracted net capital inflows of $13 billion so far this year, notably supporting tech stocks. As the Chinese and Hong Kong stock markets pick up, markets in the rest of Asia are falling hard, sometimes dragging their currencies down with them.
Indonesia on the watchlist
While all the ASEAN countries and India are affected by this phenomenon, Indonesia appears to be particularly in the firing line. Around $1.5 billion has flowed out of the country in the year to date and stock market indices have lost more than 15%. The rupiah has also fallen to its lowest level since the Asian crisis of 1998, bringing back painful memories of a time when markets saw the country as one of the “usual suspects”, i.e. an economy that quickly went into a tailspin whenever the global economy hit turbulence.
Bank Indonesia (BI), the country’s central bank, has been quick to intervene in foreign exchange and bond markets to stabilise the currency. Citing external factors and the prevailing general uncertainty, BI has omitted to point out that Indonesia is also under attack for domestic reasons linked to growing concerns over President Prabowo Subianto’s fiscal policy.
Subianto’s programme, aimed at providing free meals to 85 million schoolchildren and pregnant women at a cost of $28 billion over five years, risks putting the public finances under pressure. The management of a new sovereign wealth fund, Danantara, meant to oversee major projects in the fields of renewable energy, food safety and technologies of the future, is also attracting scrutiny.
A number of oligarchs who are very close to the centre of power –notably including the president’s own brother – sit on the fund’s management committee, heightening the risk of collusion, corruption and conflicts of interest. This lack of transparency and the potential for political interference are worrying investors, already put off by the project to build a new capital on the island of Borneo1, which is struggling to attract the private investment needed to fund its development.
Alongside this, trade-offs to control the deficit appear arbitrary and abrupt: the education budget has been slashed, causing students to rise up in protest, and some government agencies have seen their budgets cut.
Will the lessons from previous crises be enough?
Lessons have been learned since the Asian crisis of the late 1990s, which brought the region’s economies to their knees. In 1998, Indonesia experienced an unprecedented recession and went through a phase of hyperinflation as its currency plummeted. It had to call on the IMF to rebuild its reserves, which were at rock bottom. Since then, it has implemented many macroprudential policies and substantially rebuilt its reserves, which now stand at $150 billion, equivalent to around seven months’ imports.
Indonesia has also introduced a fiscal golden rule limiting its deficit to 3% of GDP and sought to limit its debt. Government debt is less than 40% of GDP, making the country one of the region’s top performers in this area. In the short term, then, there appears to be little risk of a debt or balance of payments crisis, though rating agencies have highlighted persistent questions over the government’s ability to raise sufficient tax to fund its capital investment.
These questions in turn raise other questions as to how the benefits of growth – remarkably stable at around 5-6% for the past 15 years (excluding, of course, the year of Covid) – are distributed. Indeed, beyond markets, the real economy appears to be slowing too: the middle class (that part of the population that spends between €120 and €580 a month) is falling behind because of labour informality. Nearly ten million people fell out of the middle class between 2019 and 2024, while the total population continued to grow from 272 million to 282 million over the same period.
The upshot is that domestic consumption is slipping: retail sales grew by a mere 0.5% in January, reducing the amount of VAT collected. Government revenue in January and February was down nearly 20% year on year, further fuelling concerns over the management of the public finances.
The central bank already cut its growth forecast in January, from 5.5% to 4.7%: – a far cry from the 8% target that was announced when Prabowo Subianto came to power.
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