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The main stock index in Indonesia experienced a significant decline of 7% on Tuesday due to concerns surrounding weakening consumer spending and President Prabowo Subianto’s expensive fiscal plans.
The Jakarta Composite index plummeted by as much as 7.1%, reaching its lowest point since 2021. Trading on the stock exchange was briefly suspended after a 5% drop in the index, but continued to fall upon resumption.
With a 14.2% decrease this year, the index is one of the worst performers globally. Additionally, the rupiah has depreciated by about 2% since the beginning of the year.
Investors are worried about the slowdown in consumption within Indonesia, where consumer confidence and purchasing power have been on the decline in recent months. Central bank data revealed a second consecutive month of decreased consumer confidence in February.
Indonesia’s middle class is facing challenges due to insufficient formal employment opportunities and a decline in the manufacturing sector.
In a surprising move, Bank Indonesia lowered interest rates in January to stimulate growth despite the weakening rupiah. They also revised the full-year growth forecast to a range of 4.7-5.5%.
The central bank is scheduled to announce its interest rate decision on Wednesday following a monetary policy meeting this week.
Since assuming office in October, President Prabowo initiated a nationwide free meals program for schoolchildren and pregnant women, costing an estimated $28 billion annually.
This initiative has strained the country’s finances further, leading to widespread austerity measures and impacting sectors like infrastructure.
Reports suggesting the potential resignation of long-serving finance minister Sri Mulyani Indrawati have unsettled investors, although the government has refuted these claims.
“While the government’s social assistance programs may support purchasing power, the recovery in consumption is anticipated to be weaker than previously projected,” noted Brian Lee, an economist at Maybank.
Maybank has revised Indonesia’s 2025 growth forecast to 5% and predicts a 25 basis points rate cut by the central bank this week due to rising economic uncertainties and job insecurities linked to Chinese competition.
As Indonesia’s focus on the commodities sector has intensified, manufacturing’s contribution to GDP has steadily declined over the past two decades. The influx of inexpensive Chinese goods has further impacted the sector, with several factories suffering closures.
One of Indonesia’s largest textile companies, Sritex, ceased operations and laid off over 10,000 employees this month after declaring bankruptcy.
Additional reporting by William Sandlund in Hong Kong