The Indonesian rupiah is currently trading at around 17,400 to the US dollar. The currency, which has been steadily weakening against the dollar for many years, surpassed the 17,000 mark last week and is now at its weakest point in history. It is weaker than it was at 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 rupee currently weakening and are we on the verge of another financial crisis?
To answer the first question, currencies tend to rise and fall in response to capital inflows and outflows. When a lot of money comes into a country, for example in the form of foreign direct investment or foreign investors buying local stocks and bonds, the currency strengthens.
When large amounts of money are spent, such as when foreign investors sell stocks, or if the country imports more than it exports, the currency usually weakens. This relationship between inputs and outputs is reflected by the balance of payments. The current account is 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 there is a deficit, we tend to see a weaker currency.
Indonesia has been running a persistent current account deficit for years, with 2021 and 2022 being exceptions, thanks to a post-pandemic boom in commodity exports. Even if the current account deficit in 2025 was modest ($1.5 billion), it makes the rupee more vulnerable to depreciation in the event of an external shock, such as war, or any other event that could undermine investor confidence.
The current account is often used to assess a country’s ability to honor its external debts. Markets expect Indonesia’s current account deficit to widen this year as the US attack on Iran drives up the price of energy imports. For now, the government is absorbing most of these costs while remaining committed to large fiscal spending plans despite last year’s revenue shortfall. Some investors find this worrying.
Moody’s and Fitch also recently downgraded Indonesia over concerns about political uncertainty, and global index provider MSCI warned the nation’s 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 massive sell-off on the Indonesian Stock Exchange, which is putting downward pressure on the rupiah. But does this mean that the country is on the verge of a new economic crisis? In my opinion, no.
A major difference is that in the 1990s the rupee was closely linked to the dollar, at an artificially high exchange rate. It did not float freely, determined by buying and selling in a free 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 let it float, which caused a very large and rapid devaluation.
It is unlikely that we will see a collapse of this magnitude today, given that the currency already trades freely. The mere fact that the rupee has risen above previous crisis levels is of little importance. What matters is relative decline. During the Asian financial crisis, the rupee fell by more than 500% against the dollar. Over the past year, it has seen a decline of around 5 percent.
Indonesia’s external debt structure also appears more manageable now. According to Bank Indonesia, in 2025, total public and private external debt was equal to 30% of GDP, the majority of which is long-term. Given the evolution of external debt levels, this remains quite modest and means that the majority of public borrowing is carried out in national currency.
External debt levels in the 1990s were higher as a percentage of GDP, and the destruction of the value of the rupee made it impossible for the government, as well as deeply indebted and politically connected companies, to pay their external debts. This specific situation is unlikely to occur again under current circumstances.
The central bank is also now better equipped to deal with a weakened currency. Bank Indonesia started March with more than $150 billion in foreign exchange reserves and has the option to raise interest rates to make rupee-denominated assets more attractive to investors. They will use these tools to support the rupee, by intervening in capital markets or raising rates to ensure that even if the currency continues to depreciate, it will do so in a controlled manner.
The gradual weakening of a currency is not necessarily a bad thing, especially if you want to boost exports and your financial system is not full of non-performing loans and bonds payable in dollars. What needs to be avoided is rapid, uncontrolled depreciation that exposes uncollectible debts and triggers panic. This is essentially what happened in the 1990s.
Much of this topic has already been covered in a recent editorial by former Finance Minister Chatib Basri. But I think it’s worth repeating, not to downplay concerns about current economic headwinds, but to emphasize that what’s happening now is different from the 1990s in many ways and is unlikely to lead to a crisis of similar magnitude.
That said, markets are clearly expressing concerns about the current policy trajectory, including Indonesia’s ability to continue to cover its external debts in the face of a growing current account deficit, questionable capital market oversight, and aggressive and unconventional fiscal policy leading to growing debt. The good news is that many of these problems can be repaired. The main thing is that the government and its policy responses are seen as credible by the markets. This is one of the reasons why former Finance Minister Sri Mulyani did his job so well. In the eyes of investors and markets, it was considered very credible.
This brings us back to one of the key differences between today and the 1990s. Because currency floats freely, it allows the market to send signals to participants so that they can make adjustments before the situation reaches a crisis point. The market is signaling something right now. How these signals are interpreted and processed is something we should monitor very closely.