Pacific Money | Economy | Southeast Asia

Why the Rupiah is Weakening

Despite what the alarming drop in the value of its currency might suggest, Indonesia is not on the brink of an economic crisis.

The Indonesian rupiah is currently trading at around 17,400 to one U.S. dollar. The currency, which has been steadily weakening against the dollar for many years, pushed past the 17,000 mark last week and is now at its weakest point in history. It is weaker than it was during the height of the Asian Financial Crisis, an event that severely damaged the economy and took the country many years to recover from. Why is the rupiah weakening right now, and are we on the precipice of another financial crisis?

To answer the first question, currencies tend to rise and fall in response to financial inflows and outflows. When a lot of money is coming into a country, say in the form of foreign direct investment or foreign investors buying local stocks and bonds, the currency strengthens.

When a lot of money goes out, for instance, when foreign investors are selling stocks, or if the country imports more than it exports, the currency usually weakens. This relationship between inflows and outflows is captured by the balance of payments. The current account is a part of the balance of payments that records the net flow of income, goods, and services. When the current account is in surplus, we tend to see a stronger currency. When it’s running a deficit, we tend to see a weaker currency.

Indonesia has run a persistent deficit in its current account for years, 2021 and 2022 being exceptions, thanks to a post-pandemic commodity export boom. Even though the current account deficit in 2025 was modest ($1.5 billion), it makes the rupiah more vulnerable to depreciation in the event of an external shock, such as a war, or any other event that might undermine investor confidence.

The current account is often used to gauge a country’s ability to make good on its external liabilities. Markets are expecting Indonesia’s current account deficit to widen this year, as the U.S. attack on Iran drives up the price of energy imports. For now, the government is absorbing most of those costs while remaining committed to big fiscal spending plans despite revenue shortfalls last year. Some investors find this concerning.

Moody’s and Fitch also recently downgraded Indonesia due to concerns about policy uncertainty, and global index provider MSCI warned the domestic stock exchange that it needed to make some reforms, and quickly, or there would be consequences. All of this is contributing to sustained capital outflows, including a rather large sell-off in the Indonesia Stock Exchange, which is putting downward pressure on the rupiah. But does this mean the country is on the brink of another economic crisis? In my opinion, no.

A major difference is that in the 1990s, the rupiah was kept closely tied to the dollar at an artificially high rate of exchange. It didn’t float freely, determined by buying and selling on an open market. The government carefully managed the rate, and it was much higher than the market would have set. Once the currency came under pressure, the government was forced to float it, and this caused a very large and rapid devaluation.

It is unlikely we would see a collapse on that scale today, given that the currency is already........

© The Diplomat