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 freely traded. Just because the rupiah has passed previous crisis levels is largely irrelevant. What matters is the relative decline. During the Asian Financial Crisis, the rupiah declined by over 500 percent against the dollar. Over the last year, it has seen a roughly 5 percent decline.
The structure of Indonesia’s external debt is also seemingly more manageable now. According to Bank Indonesia, as of 2025, total public and private external debt was equal to 30 percent of GDP, the majority of which is long-term. As external debt levels go, this is pretty modest, and means the majority of government borrowing is done in domestic currency.
External debt levels in the 1990s were higher as a percentage of GDP, and the destruction of the rupiah’s value made it impossible for the government, as well as deeply indebted politically connected corporations, to pay their foreign debts. That specific situation is unlikely to recur under current circumstances.
The central bank is also better equipped now to deal with a weakening currency. Bank Indonesia entered March with over $150 billion in foreign reserves, and has the option of raising interest rates to make rupiah-denominated assets more attractive to investors. They will use these tools to back-stop the rupiah, intervening in capital markets or raising rates to ensure that even if the currency does continue to depreciate, it does so in a controlled manner.
Gradual weakening of a currency is not necessarily a bad thing, especially if you want to boost exports and if your financial system is not awash in non-performing loans and bonds payable in dollars. The thing to avoid is a rapid, uncontrolled depreciation that exposes bad debts and touches off a panic. That is essentially what happened in the 1990s.
Much of this was already covered in a recent op-ed from former Finance Minister Chatib Basri. But I think it’s worth repeating not to minimize concerns about current economic headwinds, but to underline the point that whatever is happening now is different from the 1990s in important ways and unlikely to lead to a crisis of similar scale.
Having said that, markets are clearly signalling concerns about the current policy trajectory, including Indonesia’s ability to continue covering its external liabilities in the face of a widening current account deficit, questionable capital market oversight, and aggressive and unconventional fiscal policy leading to mounting debts. The good news is that a lot of this is pretty fixable. The key is that the government and its policy responses be seen as credible by markets. That is one reason former Finance Minister Sri Mulyani was so good at the job. In the eyes of investors and markets, she was seen as very credible.
This brings us back to one of the key differences between today and the 1990s. Because the currency floats freely, it allows the market to send signals to participants so they can make adjustments before things reach a crisis point. The market is signalling something right now. How those signals are interpreted and acted on is something we should be keeping a very close eye on.
