Index trend
Previous Quarterly Editions
Expropriation risk: 60 59 58 57 ► Political violence risk: 51 51 51 51 ► Terrorism risk: 53 53 50 50 ► Exchange transfer and trade sanction risk: 44 44 44 44 ► Sovereign default risk: 47 47 47 37 ▼
Overall Risk Temperature: 51 (Medium -1) TREND ►
Special topic: Political polarization
Indonesia’s geography, demographics, and cultural and societal differentials, coupled with an institutional aversion to conventional ‘party’ politics, has resulted in often overlapping multi-polarities that serve as a focus or catalyst for competition and conflict. Overarching drivers that created polarization in the past are highly likely to do so in the future, generating the impetus and friction that may well determine the country’s political and economic direction.
The most dynamic polarity, and one that appears certain to increase in significance under the presidency of Prabowo Subianto, is the division between age groups. The median age of the country’s 284.5 million population is around 30 years. Within this cohort around 28% are Gen Z (born 1997–2012).
Almost 60% of the population now live in urban areas, against 44% in 2010. The rapid transition from a largely agrarian to a service or industrial economy has eroded many traditional sources of community or individual loyalties, affinities and cultural influences, often replacing them with heightened precarity.
Mass protests early this year reflect these trends, while forecasts of mass redundancies across multiple industries point toward new tensions and matching responses. The outcome depends on the extent to which the young urban demographic — the principal casualties of any economic readjustment — choose to confront the state as well as the nature and severity of the government’s response.
Collateral to this is the role of political Islam, which in the past has been both encouraged and suppressed by the state, and regional centrifugal sentiments that could threaten the geographical unity of the nation.
Prabowo’s actions indicate that he is seeking to cement the support of the poorest demographic through extending subsidies, while his past conduct and reliance on the military suggests he is likely to opt for force if his authority is seriously challenged.
Expropriation Risk 57 ( Significant) TREND ►
The risk from some form of expropriation or related actions that may disadvantage investors is rising in line with the government’s overtly nationalist economic policies. U.S. tariffs, if they persist, may also attract countermeasures.
The shape and direction of the administration has become clearer since Prabowo Subianto assumed office in late October 2024, with moves toward a more interventionist state. A number of actions and policies have triggered growing concern among local and international investors over the country’s direction, most notably Prabowo’s elevation of the military’s political and economic role and influence, and fiscal policies that are straining state finances.
The administration’s first six months in office has been characterized by actual or potential disputes with some of the country’s key overseas investors, notably extractive companies, while more than 60,000 workers lost their jobs mainly in the textile, garment, footwear and electronics sectors in the first two months of 2025.
Other controversies include Prabowo’s decision to create the Danantara national sovereign wealth fund, which raises governance issues amid allegations of large scale corruption within key business sectors. The stock index fell by about 14% during the first quarter of the year, while the rupiah declined around 2%.
Political Violence Risk 51 (Medium) TREND ►
Widespread student protests in late February 2025, referred to as ‘Dark Indonesia’ were called to demand an end to government cuts in the education and infrastructure budgets imposed to help fund Prabowo’s multi-billion-dollar free school meal program as well as highlight deteriorating economic conditions. The protests were the first serious political ‘street level’ challenge to Prabowo’s administration, with further similar unrest highly probable.
Student protests have long served to highlight specific and general opposition to government policies or actions. Given that students generally have privileged socioeconomic backgrounds, the authorities treat such protests with caution by allowing them more latitude than less well-connected citizens. Failure to do so can serve as a catalyst for wider protest, as Prabowo discovered when, as a senior army officer, he was implicated in the alleged abduction and torture of student activists as the New Order regime disintegrated in the late 1990s.
The potential for political stability and related violence is increased by the impact of U.S. tariffs on unemployment.
Terrorism Risk 50 ( Medium) TREND ►
No serious acts of terrorism have been recorded in Indonesia since December 2022.
Nevertheless, in February a senior Indonesian police officer reported that the authorities had shut down 3,000 social media sites allegedly linked to terrorism, without offering details of the criteria employed to define such activities. The emphasis on cyber-based activities by designated or suspected terrorist groups or affiliates may reflect the effectiveness of the country’s counter-terrorism strategy against physical attacks or mark a more coherent change of strategy by extremists based on building and nurturing support through propaganda and other non-kinetic actions.
Exchange Transfer and Trade Sanctions Risk 44 (Medium low) TREND ►
The government’s decision to prioritize the interests of the poor while facing other budgetary constraints increases the risk that policies may be introduced that impose costs or other constraints on established trading and financial arrangements. Here too, the U.S. tariff regime may further increase such risks.
Prabowo’s decision to prioritize subsidized school meals and create the Danantara state investment fund, in addition to maintaining a relatively low price for key fuels used for cooking and transport, has resulted in programs costing many billions of dollars as well as significant cuts to government expenditure in other areas. This has increased demand for new sources of revenue, which include proposals to increase royalties paid by resources companies, many of which are foreign owned.
In mid-February Prabowo signed a regulation requiring natural resource exporters, other than those engaged in the oil and gas sectors, to retain all proceeds from their activities within the Indonesian financial system for at least one year, a measure the government assesses will increase the country’s foreign exchange reserves by $80 billion. This combination of factors, coupled with the creation of Danantara and Prabowo’s strong personal influence over the new wealth fund, has been linked to the recent rise in foreign investors exiting the local stock market, already one of the world’s worst performing this year.
Sovereign Default Risk 37 (Medium low) TREND ▼
Indonesia recorded a GDP growth rate of 5.03% in 2024, highlighting the challenge facing Prabowo’s declared goal of 8% by 2029. There is no indication that Prabowo’s policies will accelerate growth within the present global economic environment. Further, the assessment of a 2023 World Bank study that nearly one-third of households are at risk of slipping into poverty may now be an underestimate. An almost $19 billion cut to the 2025 budget announced in January, coupled with the free school meal program and the cancellation of tax increases, resulted in a budget deficit equivalent to 2.53% of GDP. Further, total government revenues fell 20.8% in the first two months of 2025, while personal tax revenues fell 30% over the same period. The declines were attributed to weaker demand for key export commodities and a change to personal tax collection.