oux{s}pd9ebvb))djxu]fr]0_media_dl_7.png Indonesia's Ministry of Finance

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(Bloomberg) — Indonesia spent much of this week confronting a question that might have seemed unthinkable a few short years ago: what happens when investors stop believing in Southeast Asia’s largest economy?

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The answer played out across trading screens around the world and at government offices in Jakarta. Stocks sank to their lowest levels since the pandemic, the rupiah breached the psychologically important 18,000-per-dollar level for the first time and rumors swirled that Finance Minister Purbaya Yudhi Sadewa was on the way out.

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By the end of the week, Purbaya and senior government officials were on the defensive. “I’m not the type to quit,” Purbaya said at a state budget briefing Friday. He was at pains to talk up the country’s fiscal position, saying the nation’s assets remain stable and inflows healthy.

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“Optimism about the Indonesian economy remains strong,” he said. “Why are people saying the economy is heading toward a recession when economic stimulus is sufficient, liquidity is sufficient, and credit growth is also sufficient? Don’t be swayed by a single news report.”

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But the damage was largely done. Investors increasingly see Indonesia as a market where policy uncertainty, political intervention and execution risks are beginning to outweigh one of the developing world’s most compelling long-term growth stories — a sentiment that’s been growing since President Prabowo Subianto took office less than two years ago.

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Investors are “concerned about the direction of policymaking in Indonesia,” Jason Tuvey, deputy chief emerging markets economist of Capital Economics, said. “Especially so, after widespread protests in the middle of last year led to the sacking of respected finance minister Sri Mulyani Indrawati. Since then, the government has adopted increasingly populist and interventionist policies.”

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Speculation over Purbaya’s departure wasn’t the only thing sending markets into a tailspin. There were also mounting concerns over the government’s economic management, confusion regarding new commodity export rules and a widening corruption investigation involving Prabowo’s flagship $15 billion free meals program.

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Rising oil prices driven by the conflict in the Middle East are also adding to pressure on Indonesia’s economy, forcing the government to spend more on fuel subsidies while facing higher import costs for crude oil and LPG. Like several of its Southeast Asian neighbors, Indonesia imports a significant share of its crude from the region, making it particularly vulnerable to supply disruptions and price shocks.

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“Indonesia isn’t alone in Asia in feeling considerable financial market pressure but in its case, the global energy shock has seemingly brought pre-existing concerns about the fiscal outlook and institutional dynamics more sharply into investors’ focus,” said Peter Mumford, who heads the Southeast Asia practice of Eurasia Group. “While the government has been sending stronger signals about fiscal discipline recently with the aim of reassuring investors, new policies have created more uncertainty.”