By Sunarsip, Senior Economist of The Indonesia Economic Intelligence (IEI) and Financial Industry Observer.
The impact of the “hit and run” reciprocal tariff policy implemented by US President Donald Trump on April 2, 2025, has sent shockwaves through global and domestic financial markets. In the domestic financial market, the rupiah exchange rate, which has been depreciating since October 2024, experienced its deepest depreciation this April (up to the second week) compared to the previous six months.
During April 2025 (up to the second week), the average JISDOR rate stood at IDR16,844 per US dollar (US$), depreciating by 2.36 percent (mtd) and 5.02 percent (ytd). The weakening of the rupiah exchange rate followed the capital movements of portfolio investors who experienced significant capital outflows after Trump’s tariff policy.
During April 2025 (four transaction days) there was a capital outflow of around IDR18.37 trillion, the highest during 2025, with details of IDR5.73 trillion from the stock market, IDR10.47 trillion from SRBI, and IDR2.17 trillion from the SBN market. During 2025, the total capital outflow from portfolio capital has reached around IDR41.05 trillion, which came from the stock market amounting to IDR25.28 trillion and SRBI IDR28.83 trillion, while the SBN market saw a capital inflow of IDR13.06 trillion.
The weakening of currency exchange rates is indeed a global phenomenon today. However, if we look at the relatively deeper depreciation of the rupiah compared to other currencies, it shows that our financial markets tend to be more fragile than other financial markets. Of course, this becomes a separate note that needs to be our concern: why does this happen?
The author sees that the condition of our financial market is inseparable from the relatively limited degree of financial deepening. The limited depth of our financial market is influenced, among others, by the limited role of corporations (private, state-owned and regional-owned enterprises) in enlivening the financial market, especially the capital market (long-term financial instruments).
As an illustration, during the 2016-2019 period (before the COVID-19 pandemic), the value of initial public offerings (IPOs) reached Rp51.11 trillion or an average of Rp13.03 trillion per year. Meanwhile, during the 2020-2024 period, the value of IPOs only reached IDR27.13 trillion or an average of IDR5.43 trillion. During 2025 (until February), the value of IPOs only reached Rp3.70 trillion.
Not only in the equity market, corporate involvement in the bond market is also very low. As of February 2025, the outstanding value of bonds traded reached Rp6,663.42 trillion. Of this value, corporate bonds reached IDR473.09 trillion or only 7.01% of the total outstanding bonds traded.
Government-issued bonds (SBN) still dominate our bond market trading. The limited supply side of financial instruments that can be absorbed ultimately causes investors to not have many investment options so that it becomes a barrier for investors to enter the financial market in Indonesia.
In addition to the limited supply side, investment regulations also have the potential to hinder the penetration of financial market deepening, especially those that apply to the non-bank financial industry (IKNB), such as insurance, pension funds, and financing institutions. This includes public fund management institutions established by the government.
Regulations that tend to be restricted have the potential to limit market growth. As a result, due to high demand, portfolio investors scramble for available instruments. This condition not only inhibits market growth but also has the potential to create predatory behavior in our financial markets. In the end, only big players grow in a financial market with limited growth.
As an illustration, in January 2025, the growth of third party funds (DPK) of national banks (including BPR) grew by 5.51 percent (yoy). On the other hand, individual deposits, which hold a share of around 47 percent of total deposits, actually recorded negative growth of -3.39 percent (yoy).
The positive (albeit low) growth of bank deposits amidst the contracted growth of individual deposits can occur because it is supported by institutional depositors. They are IKNBs that manage long-term public funds which should place more of their funds in long-term instruments because they provide higher returns.
See, bank deposits from pension funds, finance companies and institutions, and venture capital grew above 70 percent (yoy) in January 2025. Why did this happen? In my estimation, this is because they find it difficult to place their funds into long-term equity or bond-based instruments in the financial market.
Because every investor wants to gain in every investment decision, this behavior has the potential to encourage the action of “frying” the price of investment instruments. And, when there is a shock caused by various sentiments, such as the current Trump Effect, the price immediately plummets. When financial markets are left by investors (capital outflow), the capitalization value immediately falls.
The potential demand in our financial markets is actually high. Apart from foreign portfolio investors, the potential demand from domestic funds is large. From banks alone, funds that have been placed in the financial market, outside of credit, have reached Rp2,300 trillion. Not to mention if we include the component of funds managed by financial institutions, such as BPJS, BPKH, BP Tapera, insurance companies, pension funds, finance companies, mutual funds, and venture capital.
The question is, with such a large potential of funds (domestic and foreign), why does the deepening of the domestic financial market seem to be shallow? Does the dominance of government bonds in the domestic bond market indicate crowding out, which inhibits the growth of corporate bond issuance? Or, is it the investment or fund placement regulations that apply to the financial industry that hinder the growth of the supply side of our financial market? Or, is the situation caused by a combination of these two factors?
Regardless of which factor is the main cause, the current situation should be a momentum to raise collective awareness that our financial markets need fundamental reforms. We, especially the stakeholders, need to realize that the slow growth of financial market deepening has contributed to the fragility of our financial sector from external disruptions.
The key to strengthening our financial market is a more comprehensive policy breakthrough and product innovation to encourage financial market growth, both in terms of supply and demand. Economic authorities play a vital role in realizing this, which of course is supported by financial industry players. So, let’s work together to make it happen from now on. (*)
