Indonesia’s financial markets face severe turbulence as President Prabowo Subianto’s signature social development initiatives collide with mounting investor anxiety over fiscal health, state control, and political centralization. On June 8, the Indonesian rupiah hit an all-time low against the U.S. dollar, while the Jakarta Composite Index has fallen 36 percent from a record high in January. The currency and equity drops follow protests in June against an agenda that critics fear is “bankrupting Indonesia,” driven largely by the heavy financial burden of the free nutritious meals program—known as Makanan Bergizi Gratis (MBG)—and the Red-White Village Cooperatives, or Kopdes Merah Putih.
Budget Strains and Market Turmoil
President Prabowo has shown strong reluctance to abandon or scale back these programs, despite widespread warnings that the spending will restrict long-term economic growth. Beyond fiscal policy, investors and demonstrators have raised alarms over a broader policy trajectory that includes the creeping militarization of the civil service, state control over key commodities sectors, and the weaponization of the legal system against the government’s political opponents.
The economic headwinds facing Indonesia occur against a complex global backdrop, as renewed conflict in the Middle East sharpens focus on import dependence across the APAC region. Even as equities slide and currency values plunge, investors continue to eye strategic domestic sectors, particularly energy, where Indonesia ranks among global leaders in energy potential and has recently improved its regulatory environment for international developers in upstream oil and gas as well as renewables.
Renewable Energy Potential and Investment Hurdles
Indonesia possesses a technical renewable energy potential estimated at 3,686 GW, spanning hundreds of suitable locations for solar, wind, and hydropower facilities. The government has set a target energy mix of 35 percent from renewables, up from the current level of 18 percent, by 2035. However, there are significant barriers hindering the realization of this potential.
Indonesia attracted around US$1.5 billion in renewable energy investments in 2023, yielding a mere 574 megawatts (MW) of additional renewable energy capacity—145 MW of which was added in 2023 from the Cirata floating solar project. This performance lags far behind regional competitors; Vietnam recorded an increase of 1,115 MW capacity in solar and wind power in 2023 alone, with a total solar capacity of 13,035 MW and 6,466 MW of wind generation. Due to slow development, the Indonesian government has reduced its 2030 renewable energy targets from 26% of the energy supply to 19 – 21%.
Regulatory bottlenecks create substantial hurdles for independent power producers and private investors. Mandatory partner schemes place the state-owned electricity utility, PT Perusahaan Listrik Negara (PLN), and its subsidiaries in the driving seat on renewable energy development through a majority shareholders’ scheme, which negatively impacts equity returns for investors. Additional friction stems from restrictions on the transfer of ownership rights, the implementation of a “deliver-or-pay” scheme, a low renewable energy ceiling tariff determined by a direct selection process, and Local Content Requirements that increase investment costs, resulting in initial system costs being significantly higher than global benchmarks.
Oil, Gas, and Upstream Regulatory Adjustments
While the renewable sector navigates structural hurdles, Indonesia’s fossil fuel sector commands massive reserves. The country maintains proven oil and gas reserves totaling 2.33 billion barrels and 34.8 Tcf, respectively. To utilize these reserves, Indonesia has opened 116 new oil and gas blocks to global investors.
These dual developments in conventional hydrocarbons and green energy leave open the question of whether regulatory reforms can successfully attract the private capital required to bridge Indonesia’s investment gaps while managing immediate fiscal pressures.
