Indonesian governance framework creaks amid concerns of government meddling

Indonesia is enduring a rough year in governance. After the MSCI market shock in January, when the index provider unexpectedly threatened to downgrade Indonesia to frontier market status, due to persistent problems: tiny minimum public floats and beneficial ownership transparency, the market fell precipitously. Swift moves from Indonesia’s Financial Services Authority (OJK) and the Indonesia Stock Exchange (IDX) to address the problems via hastily introduced rule changes, have failed thus far to convince MSCI that the problems have been solved. MSCI has postponed its final decision on any reclassification of Indonesia’s market until November. 

In February, OJK and IDX announced plans to demutualize the stock exchange to address perceived conflicts of interest, strengthen governance and improve its competitiveness. The IDX, like most other stock exchanges in Asia, will become a for-profit corporation. The move will separate membership trading rights from ownership and is expected to lead to investment from external entities, and eventually, likely a listing on its own exchange.

The OJK is still working on the detailed rules for the demutualization plans, which it says will be completed by the end of Q3 2026. However, concerns are already being raised by analysts that the government of President Prabowo Subianto will use the IDX demutualization as an opportunity to centralize control over a key economic asset. On August 10, IDX confirmed that it had received a written expression of interest from state-owned investment entity, BPI Danatara, to invest in the demutualized IDX and expected Bank Indonesia, the central bank and the Ministry of Finance to invest alongside Danantara.

While the OJK and IDX were quick to reassure investors that the IDX will remain independently run from state interference, recent events have increased concerns among international investors that President Prabowo’s government remains focused on exerting increasing control over key parts of Indonesia’s vast economy.

On July 27, Bank Indonesia Governor Perry Warjiyo on July 27 unexpectedly announced his resignation, just two years before completion of his term. Long regarded by investors as an independent and capable technocrat, Warjiyo claimed he was resigning for personal reasons. Analysts pointed to the February appointment as a deputy governor of Prabowo’s nephew, Thomas Djiwandono, as an indication that the independence of Bank Indonesia was uncertain and that Warjiyo had resigned as a result. Strong enough was the international approbation that Prabowo blinked, nominating Destry Damayanti, a veteran economist and widely regarded as credible, to replace Warjiyo. 

Of even more concern among international investors and analysts is the increasing participation in Indonesia’s economic development of Danantara, with concerns that its increasingly assertive role as a consolidated super-holding entity and sovereign wealth fund represents a fundamental transition toward state capitalism. Since its founding in 2025, Danantara has assumed strategic investment control over more than US$600 billion in SOEs, including banking behemoths such as Bank Mandiri and Bank Rakyat Indonesia, state oil company Pertamina and power monopoly Perusahaan Listrik Negara. While the Prabowo government claims that Danantara’s goal is to reform the SOEs and improve efficiencies and returns, critics note that centralizing control over so many critical state assets concentrates economic control and decision making within a very small number of politically connected hands. For example, the Chief Investment Officer of Danantara, Pandu Sjahrir, is the nephew of Luhut Binsar Pandjaitan, the Chair of President Prabowo's National Economic Council and one of Prabowo’s closest allies. Danantara’s supervisory board is chaired by Erick Thohir, the SOE Minister. And Danantara CEO, Rosan Roeslani, was the Chairman of Prabowo’s 2024 Presidential campaign. 

Roeslani will be familiar to many international investors. He was the CEO of Berau Coal, an Indonesian mining company when it became entangled in the Nathaniel Rothschild/Bumi plc debacle back in 2012. As that deal unwound amid acrimony and litigation, an independent investigation undertaken in 2013 by law firm Macfarlanes LLP revealed that some US$173 million was funneled out of Berau Coal during Roeslani’s tenure as CEO for expenditures that had "no clear business purpose." 

As Indonesia fights to regain international credibility for its capital markets, it can ill-afford any further political or economic scandals. The OJK and IDX only moved to amend the IDX rules after the powerful external stimulus provided by MSCI, and the ensuing market rout. The IDX rules had languished untouched for years prior to that. Real market credibility requires more than reactive compliance. If Indonesia is to restore foreign investor confidence in its economy and markets, it will need more transparency and institutional autonomy, not increased state interference and political cronyism.