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A fluid situation

An uneasy calm has settled in after three days of escalating protests across Indonesia. The protestors’ grievances included the recent announcement of an increase in housing allowances for parliamentarians, with the source of tensions thereafter broadening out to police brutality, youth unemployment, job losses in selected sectors, and economic inequality. There were reports of rioting and looting in the residences and workplaces of a few ministers, including Finance Minister Sri Mulyani, as protesters clashed with the riot police across a few cities, including the capital Jakarta. The violence also resulted in casualties and widespread damage to government buildings and public facilities in many provinces. 

How have the authorities responded?

In an address to the nation on Sunday and putting up an unified front by inviting coalition partners as well as seniors from opposition parties, President Prabowo called for peace and stability, announcing a rollback of the proposed increase in housing perks and ordered a moratorium on overseas travel by MPs. At the same time, he also maintained a tough line to restore stability and maintain control by asking the police, together with the military to undertake strict action against unlawful acts. He announced plans for the House leadership to engage in direct dialogue with community groups, student representatives, and civil society groups, to open formal channels for expressing public concerns. The President cancelled a planned trip to China for the Shanghai Cooperation Organisation Summit (SCO) to deal with the domestic exigencies. 

Economic implications

The economic impact is not yet evident, given the relatively short duration of these protests. If the official response to appease the protesters is perceived as being insufficient, any subsequent flare-ups are likely to dampen consumption demand, tourism, and investment. We maintain our view of softer growth in the second half of the year Indonesia: Growth speed-bump ahead after 1H25 growth averaged 5% yoy, defying expectations. Domestic challenges risk amplifying prevailing global uncertainties.

The government has responded with a rollback of a few contentious announcements; however, a broader roadmap to address economic needs should follow. Consumer confidence has been soft, coupled with weakness in high-frequency demand indicators. The aggregate unemployment rate is low, although that of youth was high, at 22.3% for 15-19 years and 15.3% for 20-24 years in 2024. Skill training and a need to improve labour productivity are other needs that public policy will likely focus on. Minimum wage negotiations for 2026 have also been protracted.

There have been a few other sporadic protests this year. Earlier in the year, budgetary spending cuts were perceived as a negative for allocations towards education, leading to student-led “Dark Indonesia” anti-austerity protests. Later in March, there were calls to stop revisions to the military law, followed by other smaller-scale revisions to selected administrative policies. Recurrent protests, especially with a risk of escalation, bode poorly for private sector investment and confidence. Historically, since the 1990s, the Reformasi movement in May 1998 was the largest in scale, eventually leading to the resignation of President Suharto after more than three decades in power.

Policy and market implications

A larger-scale reorientation in fiscal expenditure is unlikely, but fresh revenue-generating measures (particularly those focused on direct or indirect taxes) are off the cards.

In its 2026 Budget, the government sought to balance welfare spending plans with the need to consolidate finances. The focus was on fulfilling people’s basic needs (food, health, education, etc.), improving human capital, modernising the military, and expanding state investment agency Danantara’s capabilities (BI cuts; markets eye 2026 Budget targets).

A cutback in transfers to the regional governments, a lack of clarity over revenue measures, and a strong growth assumption (2026 at 5.4%) could impact the underlying math. Social welfare priorities will continue, with the flagship free nutritious meals program allocated IDR 335trn vs IDR 121trn in 2025.

Our forecast for this year and 2026 is for the fiscal deficit to stay closer to 2.9% of GDP, baking in revenue slippage risks. Any deterioration in the fiscal run rate is likely to be adjusted by scaling back expenditure during the year. 

Bank Indonesia lowered rates by a cumulative 100bp this year, and we have one more 25bp pencilled into our baseline forecast. There is scope to ease further, subject to rupiah volatility. The rupiah, especially in the NDF markets, came under intense depreciation pressures last week, attracting the central bank’s presence to lower volatility and stabilise price action.

Sentiments are likely to be jittery in the FX space. Foreign investors have been net buyers in the domestic bond markets this year, helping to push yields sharply lower, before the latest escalation in protests. With heightened rupiah volatility, hedges to safeguard against this risk might rise. DBS FX Strategist opined here, if conditions stabilise, USD/IDR should retrace some of its rise from the year’s low of 16115 to 16500 in the second half of August. Our FX views are highlighted in FX Quarterly 3Q 25: Bearish USD, bullish JPY under Fed’s shadow. We expect bonds to stay in favour once tensions pass. Stock markets also opened in the red on Monday, with the cautious view on equity action already reflected in net outflows over the last three quarters. The foreign reserves defence, to fight against volatility, is adequate according to the IMF’s ARA metric, though it could benefit from further absorption of dollar flows.

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