Indonesia is currently grappling with a significant economic crisis as its currency, the rupiah, has fallen to record lows against the US dollar. This alarming development has evoked memories of the infamous 1997-98 Asian financial crisis, a period marked by severe economic turmoil across the region.

The rupiah is now trading at a historic low, reflecting market anxiety stemming from a combination of domestic and international factors. Notably, the slide in the currency began weeks before President Prabowo Subianto's announcement on “Liberation Day,” a national event that typically celebrates the country's independence.

Since Prabowo’s inauguration in October, the rupiah has depreciated by approximately 8 percent against the dollar, heightening concerns about his ability to effectively manage Southeast Asia’s largest economy. Observers have expressed worries regarding the former general's economic policies and their potential impact on investor confidence.

According to Achmad Sukarsono, an analyst with Control Risks consultancy in Singapore, the decline of the rupiah serves as an indicator of global investor confidence in the current leadership’s economic decisions. He commented, “What’s happening in Indonesia now reflects how confident global investors and markets are in the economic decisions of the current leadership.”

The currency's significant downturn mirrors historical precedents, particularly the collapse of the rupiah in 1998, which was a catalyst for a financial crisis that ultimately led to the end of over three decades of authoritarian rule under President Soeharto. Hal Hill, a professor emeritus of Southeast Asian economies at the Australian National University, noted, “There’s still that memory that if the Indonesian rupiah declines quite a bit, people start to get edgy, and they think it’s a repeat of the earlier crisis.”

The exact onset of the currency slump can be traced back to a period just before Prabowo took office, culminating in an all-time low of 16,850 rupiah per US dollar on Tuesday. This fall is particularly significant as it breaches a psychologically important threshold, further amplifying public anxiety about the economic direction of the country.

Several key factors are driving the rupiah's depreciation. Political uncertainty, inflation, trade imbalances, and investor speculation are all contributing to the worsening situation. Specifically, Prabowo's controversial policies, including a $30 billion free school lunch program, efforts to weaken the central bank’s independence, and increased restrictions on foreign companies like Apple, have raised alarms among investors regarding the stability of the Indonesian economy.

Economist Arianto Patunru, a fellow at the ANU Indonesia Project, expressed that the core issue is “heightened uncertainties” which have led to a “significant drop in market confidence.” Additionally, Prabowo’s establishment of the Danantara sovereign wealth fund, which utilizes $20 billion in government funds, and his push to allow military personnel to take on more civilian roles have drawn criticism and concerns reminiscent of Soeharto’s dictatorial regime.

Amidst this economic turmoil, there have been rumors regarding the potential resignation of Finance Minister Sri Mulyani Indrawati, who had previously been instrumental in guiding Indonesia through the global financial crisis of 2007-09. These rumors surfaced as the financial and currency markets faced increasing instability.

Adding to Indonesia's challenges, the country is also contending with the repercussions of China’s economic slowdown and the escalating trade war initiated by former US President Donald Trump. Notably, on “Liberation Day,” Trump announced a substantial 32 percent tariff on Indonesian imports, further complicating the economic landscape.

Despite ongoing challenges, Indonesia has shown signs of economic growth. As a middle-income country, its per capita gross domestic product (GDP) was reported to be $4,960 in 2024, and the economy grew by over 5 percent in the previous year. However, these figures mask a troubling reality for many Indonesians, as the number classified as middle class has significantly declined due to rising inflation and the lingering impacts of the COVID-19 pandemic.

According to Jakarta’s Central Bureau of Statistics, the middle-class population has dropped from 57.3 million in 2019 to 47.8 million last year, indicating a troubling shift in economic stability. Former finance minister Muhammad Chatib Basri has described the current middle class as an “economically distressed population” grappling with diminishing purchasing power and limited savings.

“Indonesia is in its most challenging and difficult period since the 1997-98 Asian financial crisis,” stated ANU’s Hill, emphasizing that both domestic and international factors contribute to this pressing situation. He highlighted that the uncertainties surrounding the new presidential administration are compounded by external economic pressures.

Control Risks’ Sukarsono further noted that the current economic woes prompt critical questions regarding Prabowo’s priorities, stating that rather than focusing urgently on the issues affecting the shrinking middle class, the government appears more preoccupied with programs that do not adequately address the pressing decline in purchasing power or the surge in layoffs affecting the manufacturing sector.