Editorial: Rupiah sinks as economic growth goes up, what’s going on?
What are we missing? Are things looking up? Well, hold your horses
The Indonesian Rupiah has been on a downward spiral in the past few months as geopolitical tensions continue to strain resources and create global instability. On May 7, it hit an all-time low of Rp 17,445 per US Dollar. Understandably, many of us are worried about an impending crisis, most especially as parallels are drawn with the periods leading up to the 1998 Asian Financial Crisis, when the Rupiah hit its previous all-time low of Rp 16,800 per US Dollar.
It is therefore not an exaggeration to say that everyone was surprised when Statistics Indonesia (BPS) released its latest record of Indonesia’s economic performance in the first quarter (Q1) of 2026, showing a 5.61 percent growth (y-on-y).
How does this make sense?
BPS data clearly indicate that the strong Q1 growth stems mainly from a rise in government expenditure, which grew 21 percent compared to Q1 of 2025. In a departure from the government’s usual habit of spending most of its state budget (APBN) allocation close to the end of the year, this time the government has front-loaded its spending much earlier.
It is quite important to note that economic performance in Q1 of 2025 was unusually weak as the government had just begun its efficiency drive, which then-Finance Minister Sri Mulyani had publicly acknowledged. It’s clearly had an effect in making this year’s Q1 performance look stronger in comparison.
Looking at the sectoral picture also complicates the celebration of the Q1 growth. Accommodation and food services recorded the highest growth at 13.14 percent, which makes sense given the timing of Eid holidays and higher household spending, while mining and quarrying suffered the deepest contraction at -8.20 percent, reflecting a much weaker picture in one of our core productive sectors.
In a nutshell, the growth is, by all means, real. But the story underneath the number is far more complicated than what meets the eye.
What deserves more attention
A 5.61 percent growth rate should, in theory, inspire confidence. When investors look at Indonesia, they’ll see momentum building up, bringing in fresh capital, and eventually the Rupiah will trend upward.
… Right?
Bank Indonesia (BI) has had to intervene heavily in domestic and offshore markets, while also tightening foreign exchange purchase rules to limit speculative demand. In recent weeks, foreign capital has indeed started to return, with BI reporting roughly Rp 57 trillion in foreign portfolio inflows into domestic financial markets by the end of April. But that rebound has not been enough to erase the palpable concerns shared by many.
The picture begins to blur again as we compare Rupiah with its regional peers. The Malaysian Ringgit, Thai Baht, and Singapore Dollar have all held up despite facing more or less similar pressure points. At this point, it’s difficult not to at least assume that there’s something else about Indonesia making investors uneasy.
Fiscal credibility remains the most obvious pain point. Indonesia’s APBN deficit in Q1 of 2026 reached Rp240.1 trillion (0.93 percent of GDP), a steep increase from Rp99.8 trillion (0.41 percent of GDP) in Q1 of 2025. Finance Minister Purbaya has framed this as part of a deliberate front-loading strategy—which may be true—but we’re not sure it’s a strategy that can be replicated and sustained.
Indonesia’s tax-to-GDP ratio also remains among the weakest in the region, falling to 9.31 percent in 2025, while government debt interest payments now consume 22 percent of APBN. With such a thin tax base and concerning budget deficit, it doesn’t help that the government seems to have no serious cost-benefit analysis to weigh the trade-offs it’s prepared to make. On top of that, the government’s Q1 primary balance hit Rp 95.8 trillion, which already surpassed the 2026 threshold of Rp 89.7 trillion.
If these facts don’t worry you, we want your secrets…
Half-hearted course correction
In late April, Deputy Finance Minister Juda Agung announced that the government had decided to discontinue the distribution of the ‘free’ nutritious meal (MBG) program on Saturdays. Saving approximately Rp 1 trillion for each Saturday removed, this decision is part of an effort to “refocus” government spending while continuing to deliver “existing priority programs with greater quality and precision,” according to Juda.
But MBG is far from the only source of concern. Last month, our editorial touched on the Rp 240-trillion gamble that is the Red-and-White Village Cooperative (KDMP) program, revealing that our fiscal risks increasingly fall outside the neat boundaries of the APBN. While the government can certainly argue that KDMP does not directly burden the APBN as its financing flows through state-owned banks (Himbara) and village funds, we doubt that anyone seriously believes the government will simply let Himbara absorb potential losses on its own.
Indonesia’s economy is increasingly steered through an increasingly convoluted network of flagship programs, state-owned banks, sovereign funds, village funds, energy compensation, and politically charged lending schemes. These may be defensible on their own terms, but collectively put the extent of the government’s fiscal accountability to question.
What we need, ASAP
This is why Purbaya’s public communication mishaps matter more beyond social media memes.
While Sri Mulyani was perceived to be fiscally conservative, Purbaya is seen as more aggressive. Neither is better than the other, but we think it’s not too late to warn that managing APBN requires not only technical capacity, but also wisdom in communicating fiscal policies to the public to keep market confidence at a healthy level. Conversely, Purbaya has not showcased the same discipline. His tendency to shrug off concerns about the APBN deficit and to dismiss expert analyses may come across as attempts to stay calm when the situation calls for serious evaluation.
President Prabowo’s decision to nominate his nephew, Thomas Djiwandono, as BI Deputy Governor back in January seems to have exacerbated these concerns. While the appointment may be defensible procedurally, even the perception that monetary policy is politically exposed might have been enough to unsettle investors.
As a bare minimum, we reckon that a return to common-sense fiscal governance really isn’t too much to ask. It might not be too late yet, but only if the government takes firm action now.