Jakarta. Indonesia’s weakening rupiah is becoming less a story about global turbulence and more a test of investor confidence in the country’s economic management, economists said, as the currency fell beyond levels seen during the 1998 Asian financial crisis.

The rupiah dropped to a record Rp 17,514 per US dollar on May 12, making it one of Asia’s weakest-performing currencies this year and intensifying scrutiny of Indonesia’s fiscal discipline, policy coordination, and dependence on foreign capital inflows.

While government officials have attributed the depreciation largely to seasonal and external factors, analysts warned that markets were increasingly reacting to domestic policy signals and regulatory uncertainty.

Indonesia More Exposed
Regional currency data comparing end-March levels in 2025 and 2026 showed the rupiah weakened 2.5% against the dollar, underperforming most ASEAN peers. Only the Philippine peso and Vietnamese dong posted steeper declines, while the Singapore dollar, Malaysian ringgit, and Thai baht strengthened.

Denni Puspa Purbasari, an economist at Gadjah Mada University, said Indonesia was being hit harder than many emerging markets because investors were closely assessing the country’s economic fundamentals and policy direction.

“Global pressures are affecting almost all emerging-market currencies, but Indonesia is facing deeper pressure because markets are paying close attention to the credibility of its policies and institutions,” Denni said.

She said Indonesia’s heavy reliance on oil imports continued to increase dollar demand, while the country’s current account deficit left it dependent on foreign capital inflows to stabilize the rupiah.

Markets Sensitive to Policy Signals
According to Denni, investors are also increasingly sensitive to government communication, particularly when economic messages appear inconsistent or poorly coordinated.

“Communication that creates uncertainty, appears ad-hoc, or signals weak coordination between institutions can undermine confidence in Indonesia’s economic management,” she said.

Fellow Gadjah Mada University economist Wisnu Nugroho said Indonesia’s relatively shallow financial markets had amplified the rupiah’s volatility compared with neighboring economies.

“The domestic investor base is still limited compared to some regional peers, making the rupiah more vulnerable during periods of global risk aversion,” Wisnu said.

He added that the US Federal Reserve’s “higher for longer” interest-rate policy had narrowed the yield gap between Indonesian government bonds and US Treasuries, encouraging investors to shift funds into dollar-denominated safe-haven assets.

Wisnu also warned that unpredictable regulatory changes and inconsistent policymaking had increased Indonesia’s perceived investment risk.

“Rapid or inconsistent policy changes can raise the country’s risk premium and trigger capital outflows,” he said.

Government Remains Confident
Despite the currency’s sharp depreciation, Finance Minister Purbaya Yudhi Sadewa dismissed comparisons with the 1998 crisis, when the rupiah collapsed to around Rp 16,800 per dollar amid economic and political turmoil.

“Our conditions are nowhere near as bad as in 1998. Our economic fundamentals are now very strong,” Purbaya said in Jakarta on Wednesday.

He stressed that exchange-rate stabilization falls under the authority of Bank Indonesia, which has repeatedly blamed external pressures such as Middle East geopolitical tensions and dividend repatriation by foreign firms for the rupiah’s weakness.

Coordinating Economic Minister Airlangga Hartarto also pointed to seasonal dollar demand linked to the hajj pilgrimage and external debt repayments.

Still, some economists warned that prolonged weakness could begin feeding into inflation, import costs, and fiscal risks.

Josua Pardede, chief economist at Bank Permata, said the current depreciation was driven more by short-term sentiment than by structural collapse, arguing that Indonesia’s economic fundamentals remain significantly stronger than during the Asian financial crisis.

“In real terms, the rupiah is still undervalued,” Josua said.

However, he warned that keeping the currency above Rp 17,500 for an extended period -- particularly if oil prices remain above $100 per barrel --- could sharply increase risks to inflation, import prices, capital flows, and the state budget.

According to him, rising oil prices have intensified market concerns because they could increase Indonesia’s import burden and strain fiscal stability. At the same time, a stronger dollar has encouraged capital outflows from emerging markets.

Domestic sentiment has also weighed on the rupiah. Earlier this year, Moody’s Ratings and Fitch Ratings revised Indonesia’s credit outlook, affecting global investors’ appetite for Indonesian stocks and bonds.