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Fried food. What's not to love? It's delicious, but also generally bad for you. And curiously, the same could be said of some stocks in Indonesia. In fact, they're often called - deep fried stocks. While they may look tasty on the outside. Inside - they're really not that healthy. Unhealthy stocks are just one of the reasons investors have become wary of Indonesia's stock market, which until recently, was the biggest in Southeast Asia. And concerns are growing over the country's potential for growth more broadly. Just three to four years ago, it was an investor's darling. There was so much buzz.
It's one of the fastest growing economies in the world. At $1.5 trillion, Indonesia's GDP is more than Singapore's and Thailand's combined. Within Southeast Asia itself, Indonesia is the largest economy. Indonesia wants to be on the world stage. It wants to grow faster. And it has all the ingredients for it. But fear of corruption and policy missteps - both in markets and government is putting this path at risk. Moody's warns Indonesia's tighter export controls may spook investors. The Indonesia market here down about 19% in the past year.
Indonesia's currency, the rupiah, has fallen to all time lows against the US dollar in 2026. And analysts doubt it will rebound any time soon. It's actually one of the worst performers against a dollar in Asia. And that sends an incredibly strong signal to investors that things aren't fantastic. This could have a ripple effect across one of the fastest growing regions in the world. Indonesian assets are often seen as a barometer for risk appetite in Asia. So can Indonesia regain investor confidence? Or does this mean a stomachache
for all of Southeast Asia? Indonesia is the world's fourth most populous country with more than 280 million people. That's spread across an archipelago. If you strung it out from across the Atlantic Ocean, it would stretch from New York to London. There's also a higher group of younger people living in Indonesia. Which makes it an attractive consumer market. Fashion brands from Uniqlo to Zara all have operations here.
It is, the world's biggest producer of Barbie dolls. One of the biggest producers of Hot Wheel cars. It's the world's largest palm oil exporter, nickel producer, and the world's largest exporter of thermal coal. Such vast natural resources have meant Indonesia always had a lot going for it. Indonesia's economy really took off in the 1970s and 80s, the country was a net oil exporter. It was a member of OPEC. And during those years it was growing at 6%, 7%, 8% sometimes. Much of this growth was overseen by President Suharto. Although his authoritarian regime raised living standards and expanded the economy,
it was also marked by widespread corruption and serious human rights abuses. Tensions came to a head in the late 90s, when the Asian financial crisis triggered a collapse in regional currencies and plunged Indonesia into economic and political turmoil. In Indonesia, the rupiah, was particularly hard hit. And eventually it led to, the near collapse of the banking system. Suharto was forced to resign in 1998. And it really ushered in a new age of democracy and financial controls in Indonesia. A lot of them are still in place today including one of the biggest one that international investors watch, which is the three percent cap on budget deficit spending.
Limits on deficit spending presented Indonesia as a responsible nation. Foreign investments coming into the country soared in the 2000s. Surpassing Vietnam, Malaysia and Thailand. This helped fuel the nation's GDP. With the exception of the Asian financial crisis and Covid Indonesia has had steady growth of around 5% a year for the past two decades. By 2014, when Joko Widodo assumed the presidency, Indonesia was viewed as the rising star in the region. Joko Widodo started to implement much more market friendly policies, allowing foreign investors to come in to areas such as infrastructure.
Trying to get companies to invest in the country's commodity market. And that actually generated a lot of excitement among not just domestic businesses or foreign companies, but also to the larger international market. But prosperity on paper has concealed the nation's pervasive wealth disparities, which led to violent protests in 2025. Public outrage over inequality and rising living costs. The country's middle class, shown here in red, has shrunk since 2018, with the number of vulnerable and poor rising. Indonesia's current president has approached these problems from a new angle.
President Prabowo Subianto has deep believes in state-led capitalism. One strategy has been to launch a sovereign wealth fund like those in Singapore or the Middle East. It's named Danantara. The idea is to actually manage hundreds of the country's state owned enterprises, which the president has deemed as being inefficient. It's supposed to also get foreign investments. One of the major concerns with Danantara is simply governance. It's seen as some sort of a piggy bank to fund some of the president's social policies. And that is creating some confusion among foreign investors.
Prabowo has also announced plans to tighten control over some of the country's biggest commodities, calling for a new state appointed company to manage exports of palm oil, coal and some nickel products. The intention of this policy is to crack down on something called under-invoicing. Which basically allows you to ship some of those profits offshore avoid taxation in Indonesia. Because it is under Danantara, it will be market friendly, it will be for profit. It would also boost state revenue needed to fund Prabowo's costly flagship plans, including his multi-billion-dollar free meals program for schoolchildren and pregnant women.
Our free meals strengthen our economy. The program is popular among some voters. But so far, positive effects across the economy have yet to materialize. It's also created strain on the country's budget. Because of these expensive social welfare programs the country is actually close to breaching its three percent legal limit. Not including the pandemic years, Indonesia's budget deficit in 2025 hit its highest level in the past two decades. International investors are worried that the fiscal state isn't quite what it used to be.
This leads us back to those deep fried stocks. It's how people in Indonesia call stocks that are heavily manipulated. Large amounts of stocks in Indonesia are owned by the nation's wealthiest tycoons. And because of this concentration, the amount of shares available for public trade - called free float - is actually quite small in some stocks. And ownership isn't always transparent. Most countries set a minimum free float requirement to make sure markets stay liquid. But in Indonesia, that requirement is much lower than in many other markets.
You can see that here. Until recently, Indonesia had the lowest free float requirement in the region. A low free float means it only takes a relatively small amount of trading volume to move the price significantly. And because of this, prices can rise very quickly. But crash very fast. Such market irregularities prompted MSCI, a global stock market index provider to warn that it may reduce Indonesia's weight in its emerging markets index. The most shocking element was the prospect of potentially downgrading Indonesia's stock market to frontier market status. In the stock market you saw a selloff that you hadn't seen since the 1998 financial crisis. And months later,
the market is still one of the worst performing in the world. It impacts where they are in the pecking order of a particular investment universe. Another clear indicator of stress are the high yields Indonesia is paying on its bonds. The higher the bond yields, the more a certain government needs to pay for those who invest in the nation's bonds. In Indonesia's case, it's one of the highest in Asia. Prabowo's government is trying to limit the damage. And has vowed to address some of these structural issues. In March, financial regulators approved a measure to double the country's minimum free float requirement.
Now, the devil's in the details. How long will it take them to really increase transparency about who owns what stocks, and will they go after some of the big market players that, might be guilty of market manipulations. All of this is happening against the upheaval of tariffs and war. Fuel prices in Indonesia are some of the cheapest in the region. If the president really wants to keep fuel prices low. He's going to have to pay for it if oil prices keep rising. A lot of emerging market currencies have come under pressure, So if we see continued selling of the rupiah of its bonds, of its stocks, it shows that investor interest in some of the
real growth stories in Asia that's waning. If there's a global loss of trust in Indonesia, Indonesia becomes more insular. I don't think anyone in Indonesian government, Indonesian business wants to see a more insular country.
