Indonesia’s Economy: Stable Yet Fragile – OpEd
The economic performance of Indonesia in 2026 is robust but fragile, as growth in the short term is sustained, but the structural weakness remains unchanged. Growth of 5.61% year on year in the first quarter of 2026, higher than 4.87% in 2025, was fuelled by robust domestic demand and supportive fiscal policy. The growth was driven by higher growth of household expenditure, which accounted for more than half of total growth, of 6.44% year on year, up from 4.87% in 2025, as well as of gross fixed capital formation of 6.04% year on year, up from 4.36% in 2025. Also, all broad sectors such as manufacturing, mining, and construction contributed positively to total growth. Thus, Indonesia is robust as the economy is growing in the short term but is fragile as growth is based on several factors which could cause pressure on the currency and impact on fiscal accounts as well as other inefficiencies that could affect the sustainability of growth.
Positive Indicators. From a surface perspective, Indonesia’s economy is still performing well. In the first quarter of 2026, the country’s GDP growth rate was recorded at 5.61% YoY, up from 4.87% in the previous year. The growth was driven mainly by high household consumption, which accounts for more than 50% of the country’s total GDP, and reached as much as a 3% growth rate. The factors that supported the growth of household consumption were a relatively stable inflation rate, the usual seasonal spending, as well as the government’s transfer programs to the citizens. In addition, the country’s gross fixed capital formation (investment) also grew robustly at around 6% YoY, which was supported by the government’s infrastructure spending as well as the positive sentiments from the private sector. Moreover, Indonesia is a broad-based economy, which is composed of manufacturing, trading, agriculture, construction, and mining sectors. This broad-based economy is able to act as a shock absorber in times of global economic downturn.
On the other hand, the composition of growth does have some cause for concern. The quarterly data indicate that growth has been uneven and subject to the ebb and flow of the government’s fiscal policy. The growth in government consumption has been spectacular on an annual basis, but this has been a thing of the last quarter and has since fallen in the current period. Growth that is driven by consumption and government spending is far less durable than that which is generated by increases in productivity and investment that are of a sustainable nature and which can generate growth in exports as well as in domestic production. Growth of this nature is also less susceptible to the vagaries of changes in consumer spending and to the vagaries of government’s budgetary policy.
The rupiah has come under intense depreciation pressure in 2025 and continues to be under pressure in 2026. As global monetary conditions have tightened, there has been an outflow of capital from emerging markets and developing economies, and Indonesia’s policy uncertainty has drawn particular attention. The depreciation of the rupiah has caused the prices of imported goods, particularly fuel and food, to increase, thus putting even greater pressure on the inflation rate and limiting the scope for monetary policy to be eased. While a depreciation in the exchange rate is of some benefit to exporters in the short term, in the longer term it increases the cost of production and reduces the purchasing power of consumers. Therefore, the depreciation of the rupiah is not simply an issue of the currency market but also reflects investors’ hesitation about Indonesia.
Fiscal condition remains another cause for concern, as shown by negative dana, which indicates a decline in the government’s fiscal balance and capacity to finance its spending. Although Indonesia’s debt-to-GDP ratio at around 29% is considered moderate and below the threshold for countries considered to be highly indebted, there are concerns about the direction of the government’s spending and how it finances that spending. While expansionary fiscal spending is needed to sustain economic growth in the short term, increased use of debt to finance that spending — particularly short-term debt — can put tremendous pressure on the government’s debt sustainability in the long run. As such, what is key is not how much the government spends, but how it spends that money effectively to achieve desired development outcomes. In the meantime, the government will need to improve its revenue mobilisation and increase the quality of its expenditure.
The structural constraints on growth are, therefore, enormous. The decline in mining output underlines Indonesia’s vulnerability to commodity price swings, a reality that policymakers are only slowly recognising and are struggling to come to terms with in promoting greater value addition in minerals and metals. Governance issues and uncertainty with respect to regulatory frameworks are also discouraging long-term investment, particularly in industries and markets that are highly capital intensive. The recent outflows from Southeast Asia of portfolio capital are also negatively affecting Indonesia more than most other countries in the region, in large measure because of concerns over the policy credibility of its leaders.
Tackling these structural issues is important for creating a more stable economy. A stable rupiah will depend on good fiscal and monetary management, clear communication and a disciplined approach. Quality over quantity in fiscal expenditure is crucial to create growth through higher productivity. Sustainably managing debt will require a clear framework of debt and it’s financing that does not stifle growth while ensuring sustainability. Improved governance, regulatory certainty, and greater transparency in the capital markets are critical to attract long-term capital to create sustainable growth. The focus on growth has to shift from consumption to creating innovation and higher value-added manufacturing to raise productivity.
Indonesia is not in crisis. The key challenge is to translate short-term growth into durable growth. Indonesia’s performance in 2026 can best be assessed against this test.
The opinions expressed in this article are the author’s own.
References
- Sulaiman, S., & Nangoy, F. (2026, May 5). Indonesia’s first-quarter economic growth is fastest in over three years. Reuters.
- Suroyo, G. (2026, May 18). Indonesia rupiah hits new record low despite currency intervention, president downplays fall. Reuters.
