Indonesian financial markets and the rupiah were rocked by sharp volatility last week as major protests erupted nationwide in response to news of a proposed monthly housing allowance for members of parliament. For many Indonesians, this allowance was seen as excessive and out of touch with everyday realities. The outrage quickly escalated as regional parliament buildings were set ablaze in multiple provinces, including West Nusa Tenggara, Central Java and West Java. Other significant targets, such as the residence of Finance Minister Sri Mulyani Indrawati, were also attacked or looted. The violence was fueled by the online spread of viral content and deepfake videos.
Markets and the rupiah have since recovered somewhat, following President Prabowo Subianto’s swift decision to roll back lawmakers’ perks, cancel overseas trips and declare a crackdown on violent elements, labeling some actions as treason or terrorism. Security forces were deployed to restore order. President Prabowo was flanked by leaders of political parties during his address, including Megawati Soekarnoputri, chair of the main opposition party. Megawati’s appearance alongside Prabowo was unprecedented, suggesting a strong show of political unity in the face of the crisis.
Beyond the headlines, dissatisfaction is rising within Indonesian government institutions and political leadership. Many disenchanted youth have begun to paint Subianto as promoting “Suharto-ism,” a term that echoes the unrest under the Suharto regime, which was marked by increased authoritarianism, a strong military and police presence, and patronage politics.
Despite strong headline economic numbers—growth reached 5.12% in Q2—many Indonesians, especially gig workers and ojek drivers, continue to struggle with stagnant wages and rising living costs. Layoffs and factory closures are also increasing, driven by weakness in the manufacturing sector.
In the aftermath of the protests, personnel changes in the executive branch cannot be ruled out. On Monday, President Subianto replaced Minister Sri Mulyani. While the immediate implications of this development are unclear, this reshuffling could unsettle market sentiment, particularly as ongoing 2026 budget deliberations may be affected. Although the new Finance Minister, Purbaya Yudhi Sadewa, would likely maintain the 3% of GDP threshold for debt issuances set by rating agencies, adjustments to the budget posture and fiscal deficit target remain possible. On the revenue side, tax collection efforts may be scaled back in response to public outcry. Meanwhile, on the spending side, the criteria for disbursing ad-hoc cash handouts could be relaxed, leading to greater use of contingency spending buffers compared to the past.
Indonesia is fundamentally stronger than in the late 1990s, when violent student protests during the Asian Financial Crisis ended the rule of former President Suharto. Macroeconomic indicators remain well anchored in a still-growing economy. Although foreign exchange reserves have fallen year-to-date, they currently remain at around $150 billion, significantly above the $90 billion line in the sand for policymakers to intervene, as they have done to stabilize the rupiah over the past week. Inflation also remains low, supporting our view that Bank Indonesia will maintain a dovish policy stance and will likely cut rates further.
At Western Asset, we remain cautious given the heightened political tensions and the risk of fiscal slippage through populist measures, such as ramping up social assistance programs. While we are confident in policymakers’ conviction and their demonstrated ability to stem currency and financial market volatility, risk sentiment remains fragile. Accordingly, we are assuming a more neutral stance on our Indonesian local government bond duration and rupiah currency positioning until greater calm is restored.