Global funds hit pause on Indonesia after Prabowo policy changes (2025)

[MELBOURNE/LONDON] Indonesian President Prabowo Subianto’s attempt to engineer an economic renaissance is running up against a hard truth: investors are not buying the vision he’s selling.

Some of the world’s biggest money managers are reticent to rush back into the country’s assets after sweeping changes under Prabowo’s administration sent stocks tumbling by the most since 2011 last month. Investors from Melbourne to London say that there are pockets of value but little incentive to load up, according to interviews with 12 buyside firms.

Government officials around the world are currently contending with the headache that is US President Donald Trump’s shock tariff hike, which has rocked markets and roiled supply chains. But Prabowo faces the added challenge of trying to manage state finances while pushing forward with his ambitious but expensive high-priority projects.

Attracting foreign inflows is particularly crucial at the moment for South-east Asia’s biggest economy. Global volatility is weakening investor confidence, already made more fragile by Prabowo’s recent policy direction. Any missteps could force a repeat of last month’s rout. In the first three months of the year, foreigners offloaded US$1.8 billion of the nation’s stocks, the biggest first quarter outflow since at least 1998.

“The market obviously is very, very nervous,” said Carol Lye, a Singapore-based portfolio manager at Brandywine Global Investment Management, which manages US$59 billion as part of Franklin Templeton. If there’s more noise around governance or big shifts in key personnel, that could spark another sell-off, she added.

Prabowo has started to chip away at long-established guardrails, which include reallocating billions of US dollars from the state budget to his priority programmes, proposals to change the mandate of the central bank and a newly launched sovereign wealth fund that reports to himself. His ambitious free school lunch programme is also threatening to push the budget deficit closer to its legal limit of 3 per cent of gross domestic product.

The concerns spilt over into the markets in March, when Indonesian equities tumbled, yields spiked on government bonds and the rupiah fell to the weakest level since the Asian financial crisis of 1998. The risk-off moves were an about-face for institutional money managers who had viewed Indonesia’s markets as one of the region’s favourites just a year ago.

“There’s no sort of bombshell coming out, it’s lots of little ones that have come along to erode growth and confidence,” said Rob Brewis, a fund manager at Edinburgh-based Aubrey Capital Management. “It’s a direction that is not appreciated by investors.” The firm sold its direct equity exposure to Indonesia in February.

Ninety One, which manages US$168 billion, remains underweight on the country. The investment firm has been focused on buying consumer-facing stocks supported by government policies while avoiding state-owned firms due to governance concerns, according to portfolio manager Charlie Linton.

Selective buying

To some investors, the sell-off has created an opportunity to return to markets at relatively compelling levels. Geneva-based REYL Intesa Sanpaolo has bought Indonesian banking stocks for their attractive dividends and JPMorgan Asset Management and Allianz Global Investors have bought Indonesian bonds in anticipation the central bank will keep easing.

“While the direction of policymaking under Prabowo warrants close monitoring, we expect it will be nuanced by his desire to seek a second term in office, and thus, he would be more receptive to public opinion,” said Ze Yi Ang, senior portfolio manager of Asia-Pacific fixed income at AllianzGI. While Allianz bought five-to-10 year bonds in late March, the firm remains “watchful of fiscal credibility”.

Liquidity is also a concern. Only 12 Indonesian companies out of more than 900 on the benchmark JCI had an average daily turnover of more than US$10 million over the past three months, according to data compiled by Bloomberg. That is the lowest ratio of any South-east Asia benchmark. And with Indonesia making up only a small sliver of the MSCI Emerging Markets gauge, searching for investable assets may not be worth the effort.

“If investors can’t build conviction, at 1.2 per cent of the benchmark, they may question whether they need to be invested in Indonesian equities at all,” said Veronique Erb, a portfolio manager for emerging market equities at RBC Blue Bay Asset Management in London, who has pared the firm’s overweight exposure to Indonesian stocks over the past 18 months. The long-term investment thesis for Indonesia remains intact despite short-term uncertainties, she added.

Prabowo’s government is in the middle of negotiating a reversal to US President Donald Trump’s tariff hikes, which could have major ramifications on the economy. Beyond tariffs, though, he will need to gain the trust of money managers to boost his country’s economic prospects.

“We will be closely watching the direction of governance as that will determine what direction the country takes longer term,” said Yasmin Chowdhury, senior investment analyst for global emerging markets at Federated Hermes. BLOOMBERG