Some thoughts on Indonesia, on what 1998 and 2013 might still have to teach us, and on why the boring answers are usually the right ones
There is a line I keep returning to whenever markets get nervous. You only find out who has been swimming naked when the tide goes out. It is a glib phrase, but the principle behind it has stayed with me for years. When money is cheap and capital is abundant, every economy looks competent. Every government looks prudent. Every central bank looks wise. It is only when the world tightens its belt that we discover which countries built their houses on rock and which on sand.
The tide is going out on Indonesia right now. I find myself thinking a great deal about what we are about to find out.
By late April 2026, the rupiah had broken through Rp17,300 per dollar. Foreign reserves had fallen to USD 148.2 billion, the lowest since mid-2024. Bank Indonesia had spent USD 8.3 billion in the first quarter alone defending the currency. Moody's and Fitch had revised their outlooks. The fiscal deficit was projected to brush against 2.9 percent of GDP, uncomfortably close to the 3 percent legal ceiling.
I do not think any of this should surprise us, and I am not sure it should panic us either. But I do think it asks something of us, and the something it asks is the most difficult thing in public policy: the willingness to make unpopular decisions before the market forces our hand.
What I Think Is Actually Happening
Headlines are not always kind to nuance, so let me try to lay out what seems to me to be going on.
There are three pressures running at once, and the unhappy thing about them is that they reinforce each other. The first is external. The Federal Reserve has refused to cut rates as quickly as emerging markets had hoped. American Treasury yields remain attractive enough that any rational global investor is asking themselves a simple question: why hold Indonesian government bonds, with all their currency risk and political uncertainty, when I can hold the world's safest asset and earn a respectable return? It is not a hostile question. It is an arithmetic one. And the arithmetic does not currently favor us.
The second pressure is fiscal. I want to be careful here, because a 2.9 percent deficit is not, by itself, alarming. Many countries run higher deficits without consequence. What seems to be unsettling markets is less the number than the trajectory and the composition of the spending. When borrowing funds ports, power plants, and productive capacity, lenders tend to be patient. When borrowing funds consumption programs whose long-term economic returns are uncertain, lenders grow nervous. The Makan Bergizi Gratis program, whatever its social merits, has somehow become the symbol around which this anxiety has gathered.
The third pressure is the one I find most worrying, because confidence is much easier to lose than to rebuild. When ratings agencies revise their outlooks, when foreign investors pull money out of bonds three months in a row, when the rupiah underperforms not just against the dollar but against the ringgit and the Singapore dollar, the market is saying something specific. It is saying that the problem is no longer purely external. Some of it is starting to look like ours.
Sitting underneath all three of these pressures is a fourth thing that does not get enough attention in the daily commentary, and that is the war.
The Fire Next Door
I do not think we have fully absorbed what the continuation of the AS-Iran conflict means for an economy like ours. The blockade of Iranian ports, the periodic threats to the Strait of Hormuz, the skirmishes that flare up and quiet down every few weeks — none of these affect Indonesia directly. We are not party to the conflict, we have no military exposure, and our trade with the parties involved is modest. It would be easy to look at the situation and conclude it has nothing to do with us.
That conclusion would be a mistake. Brent crude has spent most of April between USD 95 and USD 100 per barrel. Indonesia is a net importer of oil. Every dollar of incremental cost on a barrel of crude flows through, eventually, to fuel prices, transportation costs, electricity generation, fertilizer, and the price of nearly every good that has to be moved or processed. The trade balance suffers first. The fiscal balance suffers second, through energy subsidies. And then the inflation numbers begin to suffer, with a lag of two to three months that we are now beginning to feel.
The numbers tell a quieter story than the geopolitics, but I think the quieter story is the more important one. CPI inflation, after spiking to 4.76 percent year-over-year in February on the back of an unfortunate base effect from last year's electricity discounts, has eased back to 3.48 percent in March. That sounds like good news, and in some ways it is. But underneath the headline, core inflation has climbed to 2.52 percent, the strongest reading in roughly nine months. Producer prices have continued to drift upward through the end of last year and into this one. The pressure is not coming from anything dramatic. It is coming from the slow, persistent grind of higher input costs working their way through the supply chain.
This is the part that worries me most. Indonesia's inflation today does not look alarming. It looks contained. But the underlying dynamic is the kind that turns into a problem only after the central bank has lost the option to address it cheaply. By the time headline inflation breaches the upper end of the target band, the cost of bringing it back has usually multiplied. The quiet months are exactly when central banks earn or lose their reputations.
Two Memories Worth Holding On To
I think often about 1998, even though I am young enough that I know it more through reading and through stories than through direct experience. The story I was told growing up was that Indonesia collapsed because of foreign speculators. That story was politically convenient at the time, and parts of it were true. But the part of it I have come to believe matters more is that Indonesia collapsed because the country had built a financial system that could not survive a stress test. Banks had borrowed in dollars and lent in rupiah. Corporations had hidden their foreign liabilities. The government had assumed, as governments often do during good years, that growth would solve every problem. When the storm came, all of these assumptions were exposed at once, and the cost of fixing them was multiples of what it would have been to address them earlier.
The thing I take from 1998 is not that capital flows are dangerous, although they are. It is that unaddressed vulnerabilities compound. Every month a country waits to fix a problem, the cost of fixing it grows. Every quarter a central bank delays a difficult decision, the credibility cost of eventually making it rises. By the time the rupiah hit Rp16,000 per dollar in 1998, the country had no good options left. Only bad ones and worse ones. Whatever else 1998 was, it was a lesson in the price of waiting.
The 2013 taper tantrum is the more useful memory, because it is closer to where we are now. When Ben Bernanke merely hinted that the Federal Reserve would slow its bond purchases, capital fled emerging markets in something close to a panic. India, Brazil, Turkey, South Africa, and Indonesia were branded the Fragile Five. We earned that label honestly. We had a current account deficit, a flexible exchange rate that traders did not fully trust, and a central bank that had been slower than it should have been to acknowledge a changing global environment.
What rescued Indonesia in 2013 was not luck and not external forgiveness. It was a decision. Agus Martowardojo, who had just taken over as Bank Indonesia governor, raised the policy rate by 175 basis points within a few months. The decision was deeply unpopular. The economy was already slowing. Politicians complained. Business groups warned of disaster. Looking back, I think Martowardojo understood something that more comfortable observers did not: in a credibility crisis, the central bank's job is not to make everyone happy. It is to demonstrate, in unambiguous terms, that the currency will be defended even at the cost of growth. That signal is what restored confidence. The rupiah stabilized. Growth recovered. By 2014, Indonesia was no longer on the Fragile Five list.
I am not sure there is a more uncomfortable conclusion to draw from 2013, but I think it is honest to say it: credibility is purchased, and the price is sometimes paid in growth.
The Argument I Find Myself Coming Back To on Rates
This brings me to something I have been thinking about for weeks, with genuine uncertainty about whether I am right.
The current policy rate of 4.75 percent is, in a textbook sense, defensible. Headline inflation of 3.48 percent sits comfortably within the target band of 2.5 percent plus or minus one. Core inflation, at 2.52 percent, is elevated but not yet alarming. Growth is moderate. A pure inflation-targeting framework would say there is no reason to tighten, and on most days I would agree.
But I am not sure these are most days, and I think the inflation picture, when looked at carefully, actually supports a hike rather than argues against one.
Consider what the numbers are telling us. Headline inflation came down in March because the base effect from last year's electricity discount finally washed out, not because underlying price pressure has eased. Core inflation, which is what central banks watch when they want to understand the persistent component of price pressure, is at a nine-month high and trending upward. Producer prices have been rising. The rupiah has weakened by roughly 5 percent against the dollar this year, and a weaker currency makes every imported input more expensive — fuel, machinery, raw materials, intermediate goods. The lag from currency weakness to consumer prices is typically three to six months. We are inside that window now.
On top of all this, there is the war. Brent at USD 95 to USD 100 per barrel is not a temporary spike that we can wait out. It is a price level that, if sustained, will steadily push energy costs into the rest of the economy. Subsidies can absorb some of this, but every rupiah spent on energy subsidies is a rupiah not spent on something else, and the fiscal pressure that creates is the very thing markets are already worried about. Either the government absorbs the cost and the deficit widens, or the government passes it through and inflation rises. There is no third option that does not eventually arrive at one of the first two.
A 25-basis-point hike, in this context, is not a tightening against a non-existent inflation problem. It is a modest pre-emptive move against an inflation problem that is forming in the data right now and has every reason to grow. The rule of thumb I keep coming back to is that central banks that wait for inflation to arrive in the headline numbers are usually too late. The right time to act is when the underlying components — core, producer prices, currency pass-through, energy costs — are all pointing in the same direction. They are pointing in the same direction now.
I want to be careful not to overstate the substance of the move. A 25-basis-point hike would not, by itself, solve the problem. It would not close the spread with US Treasuries. It would not, on its own, halt the outflows. What I think it might do is something subtler and possibly more important. It would tell the market that Bank Indonesia is awake to the inflation risk, that it is willing to accept short-term economic costs in exchange for long-term stability, and that the days of relying on intervention alone may be ending.
This is why I have come to think of it as a symbolic hike. Not symbolic in the sense of trivial, but symbolic in the sense that the signal is the substance. Markets respond to signals as much as to math. When a central bank acts before it is forced to, it earns credibility. When it acts only after the market has imposed losses on it, that credibility has to be rebuilt later at a much higher price.
There is a serious objection to this view, and I want to acknowledge it honestly. The government has signaled a clear preference for monetary easing to support growth. A rate hike would create friction with the executive branch. It would be politically inconvenient. Some would say it would be reckless when domestic demand is already soft.
I have sat with this objection for a while. What I keep coming back to is this: a central bank that subordinates its judgment to political convenience eventually stops being a central bank. Every emerging market that has gone down that road has paid for it later, and the bills tend to be larger than the savings. Turkey is the most painful recent example. Argentina is the perennial one. Indonesia in 1997 was another.
I do not think the independence of Bank Indonesia is a bureaucratic abstraction. I think it is the single most valuable asset on its balance sheet. Spending it to avoid a difficult conversation strikes me as the most expensive thing a country can do, even though the expense never appears on any quarterly report.
On the Budget, and Why Rescaling Is Not the Same as Cutting
Now to the fiscal side, where I think the harder and more important work actually lies.
I want to be careful here, because there is a tendency in moments like this to demand austerity. To insist that programs be cut, that spending be slashed, that the government tighten its belt with theatrical severity. I have come to think this instinct is usually wrong. Austerity in the middle of a confidence crisis often makes things worse, not better, because it deepens the recession that the panic was warning against in the first place.
What seems to be needed is not austerity. It is something more modest and more difficult: rescaling.
Take Makan Bergizi Gratis as the obvious example. I am not going to argue here about whether the program is morally good or politically necessary. Reasonable people disagree, and I am not sure my opinion on the social question adds much. What I am willing to argue is that a program of this magnitude does not need to be implemented at full speed in its first year. It can be phased. It can be regionalized, starting in the areas of highest nutritional need and expanding as fiscal capacity allows. It can be designed with built-in efficiency mechanisms, with public-private cost sharing, with monitoring that gives the public confidence the money is being well spent. None of this would betray the program's purpose. All of it would tell markets that we are being thoughtful about how we get there.
The same logic seems to me to apply more broadly. Indonesia does not need to abandon its development ambitions. It needs to sequence them. Capital expenditure on productive infrastructure deserves protection, and in some places acceleration, because it pays for itself over time and signals to lenders that we are using debt for the right purposes. Consumptive spending, however well-intentioned, can move at a more careful pace.
There is something deeper underneath this point. Markets are not stupid. They distinguish between governments that borrow to invest and governments that borrow to consume. Indonesia's debt-to-GDP ratio of around 39 percent is not high by international standards. What seems to concern markets is not the level but the quality of what we are buying with the borrowing. Showing, in concrete budget allocations, that we still prioritize productive spending over politically rewarding consumption would do more to restore confidence than any number of intervention press conferences.
I would push the point one step further, because I think it has been understated in our public conversation for years. Indonesia's tax-to-GDP ratio sits around 10 to 11 percent, well below our regional peers. We have spent two decades discussing tax reform without doing the difficult work of broadening the base, formalizing the informal economy, and improving compliance. Every year we delay, the cost of borrowing rises a little, and the room for genuinely transformative spending shrinks a little. A serious fiscal anchor would include not just spending discipline but a credible, multi-year plan to raise revenue. Not necessarily through new taxes, but through better collection of the ones already on the books.
Why One Without the Other Will Not Work
Here is the part I feel most strongly about, even if I am uncertain about everything else. Monetary action and fiscal action, taken in isolation, will probably fail. The market is too sophisticated to be fooled by half measures.
If Bank Indonesia raises rates while the government continues signaling fiscal expansion, the market will conclude that the central bank is fighting the executive branch, and confidence will not return. If the government tightens fiscal policy while the central bank refuses to defend the currency, the market will conclude that monetary authorities have lost their nerve. The two arms of macroeconomic policy need to move in coordination, and they need to move with one voice. This is harder than it sounds, because it requires people who do not always like each other to agree publicly that they do.
I think the most important thing that could happen in the next sixty days is not a specific rate decision or a specific budget revision. It is a joint announcement: the President, the Minister of Finance, and the Governor of Bank Indonesia, on the same stage, with the same message. Something close to: we acknowledge the pressure, we have a coordinated plan, and the plan involves shared sacrifice across both fiscal and monetary policy. Markets do not need optimism from us. They need clarity.
When Mexico stabilized after the 1995 peso crisis, the announcement of a coordinated package, even before all the details were finalized, was what calmed the market. When Brazil stabilized in 1999 after its own brutal devaluation, the same coordinated approach was used. Indonesia in 1998 did not have this. Indonesia in 2013 eventually achieved it. The countries that recover fastest from currency crises seem to me to share one trait: their institutions speak with a single voice, even when speaking with one voice is politically painful.
A Closing Thought
I want to end with something more honest than analytical, because I have come to think that the philosophical questions in moments like this matter more than the technical ones, and I do not want to pretend otherwise.
There will be voices in the coming weeks calling for dramatic action. Capital controls. Emergency stimulus. Confrontational rhetoric toward foreign investors. Subsidies to soften the blow of the weaker currency. Each of these has a certain political appeal, and I understand why people will be drawn to them. But each of them, as far as I can see, would be a serious mistake. Capital controls would destroy decades of credibility-building in a single quarter. Emergency stimulus would deepen the fiscal concerns that started this in the first place. Confrontational rhetoric would accelerate the very outflows we are trying to stop.
What this moment seems to call for is the opposite of dramatic action. It calls for boring competence. A modest, well-signaled rate hike. A credible, phased adjustment to the budget. A coordinated communication strategy. A willingness to absorb short-term political costs in exchange for long-term institutional credibility.
This is not glamorous. No politician wins reelection by responsibly rescaling a popular program. No central bank governor becomes a national hero for raising rates 25 basis points. But the test of an institution, in the end, is not how it performs when conditions are favorable. It is how it behaves when conditions are difficult and the temptation to take shortcuts is at its strongest.
We have been here before. We have made the wrong choice before. We have, occasionally, made the right one. The difference between the two outcomes has rarely been the severity of the storm. It has almost always been the discipline of the response.
The tide is going out. What we look like when it does is, in the end, up to us.
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