On May 5, 2025, the rupiah fell to its weakest level in history at 17,445 against the US dollar. The figure even surpassed the lowest point of the 1997–1998 Asian financial crisis, an economic disaster that took Indonesia years to recover from.
Still, economists agree that today’s situation is structurally different, although the pressure is real and cannot be ignored.
So, what makes the rupiah so vulnerable, and why is the problem more complex than simply the war in the Middle East?
The Rupiah Was Already Weak Before the War
It is important to note that the rupiah had already been under pressure before the Iran conflict erupted in late February. Investors were already concerned about three issues: Indonesia’s fiscal condition, central bank independence, and capital market transparency. The war only accelerated pressures that had already been building.
The structural root lies in the balance of payments. Indonesia has recorded a persistent current account deficit almost every year, except during 2021–2022 when the post-pandemic commodity export boom temporarily created a surplus.
In 2025, the deficit remained relatively small at US$1.5 billion. However, markets expect it to widen as the US attack on Iran drives imported energy prices sharply higher.
The problem is compounded by Indonesia’s economic structure. The country exports dollar-denominated commodities such as nickel, coal, and palm oil, while also importing essential goods in dollars, including refined fuel, capital goods, and food.
When oil prices rise, import costs increase faster than export gains. As a result, the trade deficit widens instead of narrowing. This contradicts the common assumption that rising commodity prices should benefit exporters like Indonesia.
Technical factors have added further pressure. Many companies settle foreign currency debt in April and May, creating a seasonal spike in dollar demand that pushes the rupiah down even further.
Many Policy Tools, but No Perfect Answer
To contain the pressure, Bank Indonesia (Central Bank of Indonesia) deployed nearly all of its instruments at once, including interventions in the spot market, offshore NDF market, domestic DNDF market, and secondary government bond market.
It also introduced tighter administrative measures as a “fifth weapon.” The limit for cash dollar purchases without supporting documents was cut from US$100,000 in March to US$25,000 per month, a 75 percent reduction in just two months. Officially, this is not considered capital control, but it effectively limits speculative dollar demand.
Foreign exchange reserves have also been heavily used. In the first quarter of 2026 alone, Bank Indonesia spent US$8.3 billion, leaving reserves at US$148.2 billion by the end of March, the lowest level since July 2024. The reserves remain adequate, but the pace of depletion shows how aggressive the intervention has been.
The interest rate dilemma is equally difficult. Since September 2024, Bank Indonesia has cut rates by 150 basis points to 4.75 percent, a reasonable move given inflation remains below the 2.5 percent target and growth is projected at 4.9–5.7 percent.
But every rate cut narrows the yield gap with the Federal Reserve, making rupiah assets less attractive to foreign investors and increasing capital outflows. In practice, the central bank faces a difficult trade-off: supporting growth risks weakening the rupiah, while defending the currency could slow the economy.
How Different Is This from the 1997 Crisis?
Nominally, the rupiah is now weaker than at the peak of the 1997–1998 crisis. But comparing the raw figures is misleading.
The biggest difference lies in the exchange rate regime. In the 1990s, the rupiah was tightly pegged above market value.
When the government could no longer defend it, the currency collapsed by more than 500 percent in a short period, triggering panic and systemic failure. Today, the rupiah trades freely. A 4–5 percent depreciation over the past year is serious, but not comparable in scale.
Indonesia’s external debt structure is also much healthier. As of 2025, total public and private external debt stands at around 30 percent of GDP, mostly long-term.
In the 1990s, debt levels were higher and dominated by short-term dollar liabilities, which triggered widespread defaults when the rupiah collapsed. That condition does not exist today.
Still, risks remain. Markets continue to question Indonesia’s ability to manage widening external deficits, weak capital market oversight, and aggressive fiscal policy despite last year’s revenue shortfall.
In the end, policy credibility, or investor trust in the consistency and predictability of government policy, remains the key factor.
Why Are Its Neighbors Facing Different Fates?
While the rupiah has fallen to its weakest level in years, two of Indonesia’s neighbors are moving in the opposite direction.
Malaysia’s ringgit has strengthened 12 percent over the past year, the strongest gain in Asia. The rally is not driven solely by a weaker US dollar.
Bloomberg analysis shows only about a quarter of the gain came from global macro factors, while the rest was supported by a 47 percent rise in foreign investment in 2025, stronger-than-expected growth, and Malaysia’s expanding role in Asia’s AI and data center supply chain.
Singapore has taken an even clearer approach. The Monetary Authority of Singapore (MAS) has allowed the Singapore dollar to appreciate faster to manage inflation, possible because Singapore uses the exchange rate, not interest rates, as its main policy tool. Its status as a stable financial hub has also attracted capital shifting away from the volatile Middle East.
The key difference is this: Malaysia and Singapore still maintain strong investor confidence during global uncertainty through solid fundamentals, sustained investment inflows, and in Singapore’s case, greater policy flexibility.
Indonesia, despite posting one of the strongest growth rates in the G20, still faces unresolved concerns over fiscal credibility and capital market governance.
