Southeast Asian markets have experienced turmoil since the beginning of the year due to uncertainty following Donald Trump’s return to power. Investors fear potential US import tariffs may disrupt value chains in which these countries are embedded, harming their exporting industrial sectors.
During Trump’s first term, Southeast Asian countries benefited from global trade reconfiguration, ballooning trade surpluses and raising fears of new measures against them. Further adding to this uncertainty is the DeepSeek effect, diverting investment to Chinese markets. Chinese equity markets have attracted $13 billion in net capital inflows this year, supporting tech stocks. As the Chinese and Hong Kong stock markets rise, other Asian markets are declining, sometimes impacting their currencies.
Indonesia is notably affected, with $1.5 billion flowing out and stock market indices dropping by over 15%. The rupiah has declined to its lowest level since the 1998 Asian crisis. Bank Indonesia (BI) has intervened in foreign exchange and bond markets to stabilize the currency but faces challenges from President Prabowo Subianto’s fiscal policy.
Subianto's plan to provide free meals to children and pregnant women, costing $28 billion over five years, could stress public finances. The new sovereign wealth fund, Danantara, aimed at overseeing major projects in renewable energy and technology, is under scrutiny. Concerns arise over potential conflicts of interest due to oligarchs close to power positions within the fund’s management.
Financial management decisions appear abrupt, with budget cuts in education sparking student protests. Lessons from the late 1990s Asian crisis have led to macroprudential changes in Indonesia, with reserves rebuilt to $150 billion, representing around seven months of imports. Despite a fiscal rule limiting the deficit to 3% of GDP and government debt at less than 40% of GDP, questions linger over the government's tax revenue capabilities for capital investment.
The real economy seems to be slowing, with a declining middle class due to labor informality. Domestic consumption is slipping, with retail sales growth at only 0.5% in January, leading to reduced VAT collections. Government revenue was down nearly 20% year-on-year in January and February, raising doubts about public finance management. The central bank revised its growth forecast from 5.5% to 4.7% in January, below the 8% target set when Subianto took power.