by Satish Chandra Mishra – Arthashastra Institute Indonesia

A Glass More Full than Empty

Indonesians have long been prone to a peculiar form of self-doubt. Confronted with evidence of genuine and remarkable progress, many still instinctively veer toward pessimism — as though the sheer scale of national transformation makes its success highly implausible.  Large-scale historical transitions displace old certainties, operate across multiple fronts simultaneously, and follow no clear road maps. When the world is littered with failed transitions and low expectations, erring on the side of caution can feel like common sense.

But a quarter century has now passed since Indonesia embarked on its democratic transformation. The evidence can no longer be denied. The Indonesian glass is more than half full. It is time for all of us to recognise it as such.

Within a single generation, Indonesia has established the world’s third largest democracy; managed an internationally praised recovery from one of the most devastating tsunamis in recorded history; and transformed its administrative architecture from a system of military governors and Jakarta-appointed commissars to more than 525 popularly elected regional heads, their deputies, and local parliaments. The scourge of acute poverty, which afflicted over 28 percent of the population during the Krismon crisis of 1997–1999, has been reduced to below 8.5 percent by the end of 2025. The prospect of a military coup — once a recurring anxiety — seems today to lie beyond the boundaries of political probability.

The macroeconomic fundamentals are, by any serious comparative standard, impressive. Open unemployment ended 2025 at under 4.8 percent. National debt stands at approximately 41 percent of GDP. Inflation has been contained below 3 percent. GDP growth has averaged above 5 percent per annum for fifteen consecutive years. Indonesia’s per capita income, measured at purchasing power parity, places it firmly among the upper tier of emerging economies.

Indonesia has also established an effective universal health insurance system, raised higher education gross enrolment by more than 600 percent over the past fifteen years, and maintained a record of religious tolerance and social cohesion that is remarkable for a country of its size, geography, diversity, and complexity. With this foundation, successive governments have reasonably aspired to a more ambitious growth trajectory: one designed to reap the country’s substantial demographic dividend, reduce chronic over-reliance on commodity exports, accelerate industrial deepening and downstream manufacturing, and close the gap to developed-country welfare standards by 2045: the 100^th anniversary of Indonesian independence.

Alas, every good story finds someone determined to spoil the ending.

The Engineered Shock: MSCI, Moody’s, S&P, and Fitch

In a six-week window spanning late January to mid-February 2026, Indonesia experienced one of its most severe outbreaks of capital market instability in recent memory. Its origins lie as much in the decisions of foreign financial institutions as in any genuine decline in  Indonesia’s economic health.

The sequence of events is instructive. On 22 January 2026, President Prabowo Subianto delivered a remarkably impressive address at the World Economic Forum in Davos, outlining Indonesia’s renewed commitment to nation building, its investment ambitions and the architecture of the newly established Danantara sovereign wealth fund and plans for its reform and consolidation. Just four days later, on 29 January, the Jakarta Composite Index (JCI) fell more than 10 percent in a single session, triggering a mandatory trading circuit breaker. Approximately USD 80 billion in market capitalisation was erased. The rupiah weakened sharply.

Within days, Moody’s Investors Service revised Indonesia’s sovereign outlook to Negative. S&P Global Ratings and Fitch Ratings warned against heightened downside risk. MSCI opened a formal consultation on the potential reclassification of Indonesia from Emerging Market to Frontier Market status — a demotion that would oblige hundreds of index-tracking funds to divest Indonesian equities automatically.

The reasons offered for these interventions ranged across several domains. MSCI raised longstanding structural concerns about market shallowness and the proportion of freely tradeable shares. The credit rating agencies cited governance anxieties: the dismissal of Finance Minister Sri Mulyani raised fears of a drift toward loose budgetary policy. Questions were raised about the management of Danantara. The August 2024 Gen Z protests were cited as evidence of social instability. Ancillary concerns were added almost as an afterthought: the size of the cabinet, the appointment of certain retired military figures to civilian roles, and the cost of the school meals programme.

The timing alone invites scrutiny. That this coordinated wave of negative signals arrived within days of President Prabowo’s Davos appearance — at a moment of heightened international visibility and active investment solicitation — was not lost on Indonesian observers. Whether by design or by the constrained logic of global financial markets reacting simultaneously to the same set of inputs, the effect was to administer a sharp and public rebuke of economic stewardship precisely when the government was attempting to project confidence and attract capital.

This was not the first time.

The Questionable Credibility of Rating Agencies

Any serious assessment of the January 2026 episode must be set against the wider record of the credit rating agencies and global index providers. That record is, to put it plainly, poor — and the agencies’ current authority rests on institutional inertia and market convention far more than on demonstrated analytical accuracy.

The 1997–1998 Asian financial crisis is the most instructive case. Having failed entirely to anticipate the crisis — despite structural vulnerabilities that were visible to careful observers for years — the major agencies then responded by downgrading the affected economies more aggressively than the deterioration of their fundamentals warranted. Far from providing a stabilising analytical anchor, they amplified panic and exacerbated herd behaviour.

The record in corporate credit was no better. Enron received investment-grade ratings from the major agencies until just days before its bankruptcy filing in 2001. WorldCom was rated investment grade two months before its collapse in 2002. Parmalat carried an investment-grade rating until days before its implosion in 2003. These are not merely outliers or excusable misses — they are spectacular failures in the agencies’ core function.

The 2008–2009 global financial crisis confirmed what the Asian crisis had suggested. The major agencies assigned their highest possible ratings to vast quantities of subprime mortgage-backed assets whose underlying credit quality was, at the very least, highly questionable. The US Financial Crisis Inquiry Commission concluded that the major rating agencies had been central enablers of the financial meltdown through the systematic mis-rating of these securities. The conflict of interest embedded in the ‘issuer pays’ model — whereby the entities being rated pay for their own ratings — had not been reformed. It had merely been obscured.

The spirit of these failures — the procyclicality, herd behaviour, the structural bias toward established market conventions — is present in the January 2026 Indonesian episode, even if its form is different. The question is not whether Indonesia has genuine structural challenges. It does. The question is whether the agencies’ interventions reflected a rigorous and fair assessment calibrated appropriately to Indonesia’s specific historical and institutional context. The evidence suggests they did not.

The MSCI and The Stock Market Question

A central irony of the MSCI’s January 2026 intervention is that the structural characteristics it cited as grounds for threatening Frontier Market reclassification have been well documented for decades. Market shallowness, concentrated ownership, and limited free float are not revelations — they are features of the Indonesian equity market consistently noted in the academic and policy literature since at least the late 1990s.

A landmark 1999 study by Claessens, Djankov, and Lang for the World Bank established the basic architecture of Indonesian corporate ownership with striking clarity: fifteen Indonesian family groups controlled 61.7 percent of total listed company assets, and the Salim family group alone accounted for 16.6 percent of total market capitalisation. More than two-thirds of Indonesian listed firms were controlled by a single shareholder or family, typically with close ties to the Suharto political network. Ownership was exercised through pyramid structures, cross-holdings, and informal family arrangements — precisely the structures that proved so destabilising during the 1997–1998 crisis.

The Indonesian stock market has long been, in structural terms, a market of limited depth dominated by a small number of powerful and interconnected actors. This has been known to any serious market analyst for more than twenty-five years. The MSCI’s decision to deploy this knowledge as a market-destabilising threat in late January 2026 — rather than engaging constructively with Indonesian regulators through established channels — therefore demands explanation. If the structural concerns were genuine and longstanding, why were they escalated into a public intervention within days of the President’s Davos appearance?

Indonesia’s equity market regulators and the Financial Services Authority (OJK) are well aware of the free-float and transparency deficits, and have set out reform targets in their Capital Market Development Roadmap. Meaningful reform of deep-rooted corporate ownership structures takes years, not months. A credible international partner would acknowledge this and work constructively toward improvement. A credible analytical institution would not threaten destabilising reclassification on a timeframe that serves no remedial purpose.

Sovereign Debt and the Limits of Formulaic Assessment

The credit rating agencies’ sovereign assessments operate within a well-established analytical framework covering four domains: growth fundamentals, fiscal position and debt sustainability, external vulnerability and reserve adequacy, and institutional quality and governance. The problem is not the framework itself. The problem is how the framework is applied when a country’s economic trajectory cannot be accurately read through the lens of past trends and static indicators.

On growth fundamentals, even Moody’s and S&P acknowledged in their February 2026 communications that Indonesia’s underlying economic performance remained solid. On external vulnerability, Indonesia’s reserve position and current account dynamics present no obvious crisis signal. The concern centres on fiscal position — specifically on Indonesia’s persistently low revenue-to-GDP ratio and on what the dismissal of Sri Mulyani was taken to portend about future budget management.

These are legitimate questions, but they deserve a more sophisticated treatment than they have received. Indonesia’s revenue-to-GDP ratio — persistently below 12 percent of GDP — is indeed a structural constraint. But it is a structural constraint with structural causes: the extraordinary scale of the informal economy, the dominance of micro and very small enterprises, the complexity of fiscal transfers under a decentralised system serving a fragmented archipelago of 17,000 islands, and the revenue implications of rights-based entitlements in health and education that were deliberately expanded as social investments. These are not signs of fiscal irresponsibility. They are features of an economy in the midst of a complex developmental transition.

The Prabowo government’s growth agenda — targeting GDP expansion above 8 percent, building Danantara as a vehicle for sovereign investment, investing in downstream industrial processing, and expanding human capital — is ambitious. Rating agencies, whose frameworks are calibrated for steady-state economies with predictable fiscal trajectories, are structurally ill-equipped to evaluate whether such an agenda is credible or merely reckless. Their instinct, when confronted with ambition that departs from convention, is to treat it as a risk. This instinct may be appropriate for a mature economy with limited growth options. It is poorly suited to an economy like Indonesia’s, where the opportunity cost of excessive caution is measured in poverty and foregone human potential.

Systemic Transitions: the Past is a Poor Guide to the Future

The deepest problem with the rating agencies’ approach to Indonesia is not methodological — it is conceptual. Rating agencies are designed to assess the probability of debt default in economies with recognisable, relatively stable institutional structures and trajectories. They do this reasonably well. What they are not designed to assess — and what they consistently fail to assess — is the political economy of systemic transformation.

Indonesia’s transition since 1998 has been precisely such a transformation: from military-authoritarian rule to consolidated electoral democracy; from centralised to decentralised governance; from an economy structured around commodity rents and Suharto-era conglomerate networks to one seeking to build diversified industrial capacity and a knowledge-intensive labour force. These transitions do not proceed in straight lines. They involve contradictions, reversals, improvisation, and occasional institutional turbulence. Assessing their trajectory requires historical and contextual understanding, not backward-looking trend extrapolation from time-series data.

Rating agencies — driven by internationally comparable indicators and quarterly reporting cycles — are structurally biased toward the measurable and the recent. They weight past performance heavily, because past performance is what their quantitative models can capture. They are correspondingly weak at assessing forward-looking structural dynamics: the value of rising education levels not yet reflected in productivity data, the long-term fiscal dividend of a formalising economy, the stability-generating effects of democratic legitimacy in a society managing intense ethnic and religious diversity.

The inclusion of ‘institutional quality and governance’ indicators in sovereign ratings is in principle an acknowledgement of these dimensions. In practice, the indicators used are blunt, their weighting is opaque, and their application is vulnerable to subjective interpretation. The dismissal of a finance minister, the composition of a cabinet, the governance arrangements of a sovereign wealth fund: these are legitimate subjects for policy analysis. They are not, in themselves, reliable predictors of sovereign default. Treating them as such, without serious engagement with Indonesia’s broader institutional architecture and demonstrated capacity for resilience, is not rigorous analysis.

Indonesia Is Not Greece. Neither is it Argentina.

The spectre raised by the agencies’ interventions — implicitly or explicitly — is the possibility of sovereign default or fiscal crisis. This possibility deserves to be examined honestly, and honestly it deserves to be rejected.

Indonesia has never defaulted on its sovereign debt. Its debt-to-GDP ratio, at approximately 41 percent, is well within the range considered sustainable by any standard analytical framework, and is dramatically lower than that of most developed economies that carry AAA or AA ratings. Its foreign exchange reserves are adequate. Its current account, while vulnerable to commodity price cycles, has shown resilience. Its banking sector, reformed after the catastrophic failures of 1997–1998, is better capitalised and better regulated than at any point in its modern history.

Greece’s sovereign debt crisis arose from a combination of fiscal excess, chronic competitiveness failure within a monetary union that removed the exchange rate adjustment mechanism, and the use of financial engineering to obscure the true state of public finances. None of these conditions obtain in Indonesia. Argentina’s recurrent debt crises reflect a specific history of monetary instability, capital flight, and creditor disputes that bears no structural resemblance to Indonesia’s situation. Drawing implicit analogies between Indonesia and these cases — through rating outlooks and market signals — is not responsible analysis.

What Indonesia is — and this is the comparison that matters — is a large, complex, democratically governed developing economy in the middle of an ambitious but well-grounded structural transformation, navigating genuine tensions between fiscal prudence and developmental investment, while managing the political demands of a diverse society of 280 million people across one of the most geographically complex national territories on earth. That is a hard thing to do. Indonesia is doing it, imperfectly perhaps but impressively for sure.

Conclusion: Toward a Honest Dialogue among Equals

The January 2026 financial shock bears the hallmarks of a coordinated intervention whose timing and framing served purposes beyond objective credit analysis. Whether the convergence of MSCI, Moody’s, S&P, and Fitch around the same negative signals in the same compressed window reflects coordination, herd behaviour, or the structural logic of indexation is a question worth investigating. What is clear is that the effect was to administer a significant economic penalty to Indonesia at a moment of political transition and strategic ambition — and that the analytical justifications offered do not withstand serious scrutiny.

The agencies have a legitimate role to play in global capital markets. Reliable, impartial sovereign assessment serves real public goods: it channels capital toward creditworthy borrowers, signals fiscal mismanagement, and provides investors with a common informational framework. These functions matter. But they depend on analytical credibility that the agencies have repeatedly squandered — through the Asian crisis, through the corporate rating failures of the early 2000s, through the catastrophic misratings of 2008. The credibility that remains rests on convention and market structure, not on demonstrated accuracy.

For that credibility to be restored — and for it to serve emerging economies fairly — several things must change. The ‘issuer pays’ conflict of interest must be addressed through structural reform, not cosmetic disclosure. Governance and institutional quality indicators must be applied with historical and contextual sophistication. And any systematic tendency to underrate emerging market sovereigns relative to comparable developed-country peers must be acknowledged and corrected.

Indonesia, for its part, has genuine reform obligations. Greater stock market transparency, improved free-float ratios, clearer enterprise and management plans for Danantara, and a persuasive medium-term fiscal framework that demonstrates both developmental ambition and fiscal sustainability are all within reach. The path to investment-grade recognition that genuinely reflects Indonesia’s strengths runs through these reforms — pursued not to placate foreign rating agencies, but because well-governed institutions serve Indonesia’s own citizens first.

What is required, ultimately, is an honest dialogue between Indonesia and the international financial institutions that judge it — a dialogue conducted between equals rather than between examiner and examinee; one that takes Indonesia’s historical record seriously rather than treating each governance challenge as though it occurred in an institutional vacuum. The agencies aspire to teach. Perhaps, in the process, they will learn. That would be the first step toward the trust that both sides currently lack, and that both sides genuinely need.

Bibliography

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