Alarming Capital Outflows from the Jakarta Composite Index on Tuesday
On Tuesday (18 March 2025), the Indonesia Stock Exchange (IDX) decided to temporarily suspend trading as the benchmark Jakarta Composite Index (IHSG) plunged 5 percent. Such trading halts target at stabilizing Indonesia's capital markets (as the rupiah was also dragged down by the capital outflows).
After reopening later in the day, the benchmark index fell further (being more than 6 percent in the red), before somewhat recovering during the day's second session. However, at the end of Tuesday's trading day the benchmark index still finished -3.84 percent in the red.
So, what caused this alarming performance? Well, there are a couple of external and internal factors that caused this worrying performance of the IHSG.
External Factors
Externally, it was worrying to see that Israel re-started its attacks on Hamas after ceasefire talks stalled. It led to (an estimated) hundreds of casualties in Gaza. This seriously reduces chances of seeing some sort of peace (or ceasefire) in the region in the short term. On the contrary, escalation is more likely now. And also new (compared to the Joe Biden administration) is that US President Donald Trump fully and openly supports Israel's actions.
Meanwhile, early in the week, the US launched its biggest military operation in the Middle East since Trump returned to the White House. In response to Houthis attacking international shipping in the Red Sea (an act of support for Hamas), the US launched a new wave of airstrikes, while also the Red Sea port city of Hodeidah and Al Jawf governorate north of the capital Sanaa were targeted. Trump also stated that he will hold Iran responsible for any further attacks conducted by Houthis.
Furthermore, market participants have been nervous due to Trump's protectionist policies, potentially triggering escalating trade wars with various countries/blocs, including China, Canada and the European Union. By raising import tariffs, market players are concerned that it will lead to easing global economic growth.
And amid uncertainty about the impact of Trump's fiscal, trade and foreign relations policies, there seems no room for the US Federal Reserve to cut its benchmark interest rate (implying many other central banks around the world - including Bank Indonesia - cannot cut their benchmark rates, thereby undermining chances of accelerating economic growth).
Internal Factors
If we turn to the internal factors that are eroding confidence in Indonesian assets, then we have to mention that data from the Finance Ministry showed a steep decline in state revenue during the first two months of 2025. This was (in Indonesian media) particularly attributed to the implementation of the new Coretax digital taxation system on 1 January 2025. Technical glitches and instability within the system disrupted taxpayers' ability to report transactions and fulfil their tax obligations. This resulted in delayed payments and a substantial loss of potential tax revenue.
In fact, in media, there was even speculation that Indonesian Finance Minister Sri Mulyani Indrawati was about to resign from her post. Considering former World Bank director Sri Mulyani is a highly respected (non-party) technocrat, stories about her resignation certainly made market players nervous (even though Sri Mulyani later reportedly confirmed in media that she is not leaving her office anytime soon).
And most likely, something that is related to the two paragraphs above, market players are also still a bit cautious regarding the performance of Indonesian President Prabowo Subianto as his programs and ambitions could hinder Indonesia's economic growth. For example, the cabinet's decision to cut huge sums of money from ministerial budgets in the years ahead to finance Prabowo's nutritious free lunch program as well as for injecting funds into new state sovereign wealth fund Danantara (we discussed this topic in depth in our February 2025 report) are certainly not without risks.
So, together, these external and internal factors have put big pressure on Indonesian assets, implying that the roller coaster ride continues. In recent weeks we have seen extreme volatility on markets, and this is likely to continue in the foreseeable future.
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