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Political Unrest Hits Financial Markets

Indonesia is grappling with a wave of protests over rising living costs, lawmakers’ pay, and police violence, rattling investors in Southeast Asia’s largest economy. On Monday, the Jakarta Composite Index dropped as much as 3.6%, while the Indonesian rupiah weakened to 16,500 against the U.S. dollar, marking its weakest intra-day level since August 1, according to LSEG data.

Despite the turmoil, analysts say the long-term growth story for Indonesia remains intact, with the short-term selloff driven primarily by market sentiment rather than structural economic weaknesses.

Analysts’ Take on Market Reaction

Howe Chung Wan, managing director and head of Asian fixed income at Principal Fixed Income, described the latest market reaction as “sentiment-driven,” noting that Indonesia continues to rank among the more stable emerging markets.

FX analyst Christopher Wong at OCBC Bank added that near-term weakness in the rupiah is expected to be temporary and should reverse once domestic uncertainties subside. “Heightened uncertainty makes precise forecasts difficult,” he said.

Economists at DBS and Macquarie Capital highlighted that investors will closely monitor the government’s response to public demands and its ability to implement structural reforms, which could reinforce confidence and stabilize the currency.

Bond Yields and Market Indicators

Investor caution also reflected in government debt markets. Yields on Indonesia’s 10-year government bonds rose to 6.335%, while yields on 30-year bonds remained relatively unchanged at 6.850%, indicating a moderate risk repricing in response to political tensions.

What’s Driving the Protests

Protests erupted over high living costs, excessive lawmakers’ allowances, and unemployment, spreading to major cities over the past week. Lawmakers’ housing allowances, reportedly 10 times the monthly minimum wage, fueled public outrage amid rising inflation, layoffs, and tax increases affecting lower-income Indonesians.

Tensions escalated after a motorcycle taxi driver was reportedly killed during police action at a protest site last Thursday, sparking violent demonstrations. Rioters have targeted lawmakers’ residences, government offices, and other public infrastructure, with hundreds storming Finance Minister Sri Mulyani’s home in South Tangerang, looting valuables and causing property damage.

Government Response

In an effort to ease tensions, President Prabowo Subianto pledged to listen to public concerns and curb lawmakers’ allowances. However, he also warned that authorities will take firm action against violent demonstrators, emphasizing that extrajudicial and unlawful behavior will not be tolerated.

Political analysts, including Bob Herrera-Lim from Teneo, noted that the protests represent a critical test for the president’s approach to dissent. Balancing public appeasement with maintaining law and order remains a delicate challenge.

Long-Term Outlook

While the immediate market reaction has been negative, economists remain optimistic about Indonesia’s fundamental economic growth, driven by its population of 284 million, strong domestic demand, and resilient export sector. Central bank officials are expected to maintain accommodative monetary policy and may intervene to support the rupiah if market volatility persists.

Experts agree that resolution of domestic political uncertainty will be key to restoring investor confidence, suggesting that Indonesia’s markets may rebound once structural reforms and government responses to protests are clear.