Danantara: Indonesia’s ticking financial time bomb

Indonesia has long walked a tightrope between ambition and overreach. It is a nation of immense potential, yet also one where fiscal mismanagement has historically led to economic crises. 

President Prabowo Subianto’s administration, with its aggressive push to create Danantara, a sovereign wealth fund supposedly modeled after Singapore’s Temasek, has placed the country on a collision course with financial instability.

With the recent collapse of Indonesia’s stock market and the temporary suspension of trading, alarm bells are ringing. The urgent question: For whom does Danantara’s bell truly toll? The answer, disconcertingly, is Indonesia itself.

Danantara was designed to be Prabowo’s economic masterstroke, a fund that would consolidate US$900 billion worth of state-owned enterprise (SOE) assets to lure new foreign investment, boost national competitiveness and fuel Indonesia’s transformation into a regional economic powerhouse.

The vision is grand, but the execution has been flawed. Unlike Singapore’s Temasek or Malaysia’s Khazanah, which grew through careful investment and surplus management, Danantara is built on a dangerous reallocation of Indonesia’s national budget. 

The government slashed funding for essential public services, including a 24% reduction in elementary education funding, a 39% cut in higher education budgets, a 18.5% decrease in healthcare spending, and, crucially, a 73% cut in public works and infrastructure projects 

But in an economy already struggling with global headwinds, these cuts have not been viewed as strategic. Instead, they have eroded public confidence, triggered economic anxieties and sparked a panicked investor exodus.

Markets naturally thrive on trust. The moment investors begin to lose confidence in a government’s ability to manage its economy responsibly, capital flight takes hold. That is precisely what is happening in Jakarta.

The Jakarta Composite Index (JCI) plunged 7.1% in intraday trading on Tuesday and was down nearly 4%, touching its lowest level in four years. Trading was suspended—an extreme measure not seen since the economic chaos of the Covid-19 pandemic. 

At the same time, the rupiah depreciated by 2% against the US dollar, signaling growing fears of capital outflows. For foreign investors, Danantara—once seen as a bold move—now looks like a ticking financial time bomb.

The heart of Indonesia’s gathering financial instability is Prabowo’s populist spending agenda. His government has promised ambitious social programs, including a US$28 billion free meal initiative for schoolchildren. 

While noble in intention, this program—coupled with Danantara’s massive budgetary demands—has created what is being viewed as an unsustainable fiscal burden. 

Indonesia has long prided itself on maintaining a budget deficit below 3% of GDP. Prabowo’s administration insists it will cap the deficit at 2.53%, but financial analysts and investors are unconvinced. 

When a government cuts essential services while expanding politically driven spending, the numbers stop adding up. Yet, Prabowo’s government remains in denial, doubling down on its fiscal strategy instead of correcting course.

No transparency, no oversight

One of the biggest concerns surrounding Danantara is its lack of transparency and accountability. Unlike Temasek or Khazanah, which are governed by independent boards and rigorous oversight, Danantara is under Prabowo’s direct presidential control. 

This structure has spooked investors, who fear that the fund could become a tool for political patronage rather than clear-eyed economic stimulus. Worse, Indonesia’s national auditors have been excluded from Danantara’s oversight, raising concerns that billions could be mismanaged or worse. 

When the foundation of an economic institution is built on secrecy rather than trust, it does not take long for cracks to appear. And as capital exits Indonesia, the rupiah is increasingly vulnerable to external shocks. A depreciating currency means higher import costs, rising inflation and greater difficulty in servicing foreign debt.

If the trend continues, Indonesia could face a full-scale currency crisis—a scenario eerily reminiscent of the 1997-98 Asian financial crisis, when the rupiah collapsed, inflation skyrocketed and the country was eventually forced into an IMF bailout.

The difference today is that Indonesia’s economy is more diversified and its banks are stronger. But no economy—no matter how resilient—can withstand reckless fiscal policies and investor panic indefinitely.

Leading economists and scholars have voiced their apprehensions regarding Prabowo’s economic strategies.

Dr Chatib Basri, a former Indonesian finance minister and respected economist, has highlighted that with limited fiscal space and high market interest rates for government bonds, structural reforms are essential to achieve Indonesia’s highly ambitious 8% GDP growth target. 

Furthermore, analysts have drawn parallels between Danantara and other sovereign wealth funds, cautioning that without proper governance, Indonesia risks creating an institution that could become a liability rather than an asset. 

Finance Minister Sri Mulyani Indrawati, a stalwart of fiscal prudence, is clearly at odds with Prabowo’s expansive policies. 

Despite her efforts to maintain a budget deficit below 3% of GDP, the administration’s spending plans are straining the nation’s finances. Speculation about her potential resignation has further unsettled investors.

Running out of time

The question is whether Indonesia is fast running out of time. If Prabowo wants to avert a financial catastrophe, his government would be wise to take four immediate measures.

First and foremost, restore investor confidence. Prabowo must quickly reassure markets that Danantara has independent oversight. That would entail quickly allowing national auditors to scrutinize the fund’s management and report on their findings.

Secondly, rebalance the budget. That would entail reallocating resources back to essential services such as education, healthcare and infrastructure. 

Slashing these sectors to finance Danantara has been a strategic misstep that has arguably weakened social foundations and triggered economic anxieties. A government cannot build long-term prosperity with an underfunded workforce and crumbling public services.

Third, enhance transparency and governance. The government must reform its governance model, ensuring that Danantara functions more like Singapore’s Temasek or Norway’s Government Pension Fund Global—i.e., as an institution led by professionals, not a vehicle for political patronage. Without transparency, investors will continue fleeing. 

Finally, Prabowo has to stabilize the rupiah concurrently with the above steps. A depreciating rupiah risks pushing Indonesia into a full-blown currency crisis. 

That means the government must coordinate with Bank Indonesia to implement targeted monetary interventions that curb inflationary pressures while restoring market confidence in the rupiah’s stability.

Indonesia still has a chance to course-correct before it is too late. But the window is closing rapidly.

If Prabowo continues down his current dangerous path of prioritizing short-term political optics over long-term economic stability, he risks undoing two decades of progress in building a strong, investor-friendly Indonesia – and, in the process, destroying the middle class.