The Central Bank Warns of Global Turbulence and Trade Fragmentation
Governor Perry Warjiyo of Bank Indonesia delivered a stern warning in Jakarta, forecasting a notably more turbulent global economic period stretching across 2026–2027, driven by a confluence of rising trade tensions, moderating growth in major economies, and persistent financial-system vulnerabilities. Bank Indonesia acknowledges that Indonesia is not isolated from these mounting external shocks and necessitates a strongly coordinated governmental response to effectively safeguard both financial stability and domestic growth momentum, with the Governor stating, “We are not immune. Indonesia needs the right policy mix and strong institutional synergy to maintain stability and build resilience.”
The first major threat stems from continuous and persistent US tariff measures that place a heavy drag on global trade flows, further weakening the spirit of multilateralism and accelerating an undesirable shift towards bilateral and regional trade arrangements. This fractured environment not only weakens overall global trade but also actively undermines the multilateral framework that has historically been crucial in supporting emerging markets, including Indonesia, in their development and integration.
Furthermore, the second core risk involves a significant global growth slowdown, particularly as the economic engines of the United States and China show distinct signs of losing steam. While some major economies like India, the European Union, and Indonesia itself still exhibit relatively solid performance, the persistent and slow cooling of inflation in advanced economies poses a major problem.
This protracted disinflationary path is expected to delay anticipated monetary policy easing worldwide, creating prolonged uncertainty for Investment and trade planning.
Financial Fragility and the Central Bank’s Digital Currency Mandate
The central bank Governor identified three additional crucial risks that will shape the intermediate economic horizon, particularly for developing nations. The third threat involves the persistently high interest rates and ballooning fiscal deficits evident in developed markets, which are collectively raising the refinancing costs for emerging economies and increasing global debt burdens.
Large fiscal deficits in advanced economies are directly responsible for keeping global interest rates elevated, thus heightening the fiscal burdens faced by developing countries in managing their own debt sustainability and capital flows. A fourth significant risk flagged by the central bank involves growing volatility and increased vulnerabilities within the global financial system.
This is specifically linked to a surge in complex derivatives trading, particularly by high-frequency hedge funds, which can trigger sudden and aggressive capital flow reversals and exert intense pressure on exchange rates in emerging markets. These sophisticated, machine-driven funds have been shown to amplify the risks of rapid capital flight and currency instability, posing a serious threat to macroeconomic management.
The fifth and final risk concerns the rapid, largely unregulated expansion of private cryptocurrencies and stablecoins. The Governor explicitly stated that the lack of clear regulatory structure and adequate oversight in this expanding domain strengthens the definitive case for implementing central bank digital currencies (CBDCs).
He stressed that this regulatory gap makes a central bank digital currency increasingly important as a means of ensuring financial system stability and sovereign control over money supply in the digital age.
Bank Indonesia’s Growth Outlook and Policy Coordination Imperative
These five escalating external risks could substantially affect Indonesia’s domestic economic outlook if the government and Bank Indonesia do not maintain a vigilant and proactive stance. The central bank has responded to these pressures by maintaining a tight monetary policy designed to firmly anchor inflation expectations, while simultaneously deploying targeted macroprudential tools to judiciously support domestic credit growth.
Bank Indonesia currently expects the domestic economy to expand within a range of 4.6 percent to 5.4 percent in 2025, a range that has been modestly trimmed to account for weaker global growth projections and softer-than-anticipated performance during the first quarter. Looking ahead, the central bank forecasts a projected GDP growth of 4.9 percent to 5.7 percent in 2026 and an even stronger 5.1 percent to 5.9 percent in 2027, based on the critical assumption that global conditions stabilize and domestic Investment significantly improves.
Indonesia’s recent performance has demonstrated inherent resilience, posting 5.04 percent year-on-year growth in the third quarter of 2025, primarily buttressed by robust household consumption and stronger exports; this followed a 5.12 percent expansion in the second quarter, bringing the cumulative growth for the first nine months to 5.01 percent. The overarching message from Bank Indonesia is the imperative for continued policy coordination between the monetary authority and the government to ensure “stability while pushing for higher and more sustainable growth.”
Market Analysis: Sovereign Debt Risk and Emerging Market Capital Flight
From a financial market perspective, the Governor’s warning about high debt and elevated interest rates in advanced economies carries a material implication for Indonesia’s sovereign debt and capital account stability. The persistence of high interest rates, particularly from the U.S. Federal Reserve, fundamentally raises the Risk-Free Rate globally, making Indonesian Rupiah-denominated assets less attractive relative to dollar assets.
This forces Bank Indonesia to maintain a tighter monetary stance than purely domestic conditions might warrant to prevent disruptive capital flight and excessive Rupiah depreciation, effectively importing monetary tightening. The flag raised on high-frequency hedge fund activity introduces a liquidity premium into the Finance system, as sudden, machine-driven capital reversals can significantly drain foreign exchange reserves and destabilize the exchange rate.
This increases the cost of external financing for both the Indonesian government and corporations. The rapid, unregulated expansion of cryptocurrencies poses a systemic risk by creating a parallel shadow Finance system outside the central bank’s oversight, potentially bypassing capital controls and facilitating tax avoidance, which erodes the government’s ability to manage the Economy through conventional means.
Therefore, the push for a central bank digital currency (CBDC) is not merely a technological consideration but an urgent tool for securing monetary sovereignty and ensuring effective policy transmission in an increasingly digitized and globally volatile Investment landscape.
Regional Economic Impact: The ASEAN Trade Diversion and Capital Shift
The projected increase in global trade fragmentation, cited by Bank Indonesia, directly impacts Indonesia’s competitive position within the ASEAN regional trade bloc by creating both risks and opportunities. As tariff pressures rise between the US and China, Indonesia stands to gain from trade diversion, where global manufacturers relocate supply chains (Foreign Direct Investment or FDI) to tariff-neutral jurisdictions within ASEAN to serve major Western markets.
This potential FDI inflow could significantly support the central bank’s optimistic 2026–2027 growth forecasts. However, the same fragmentation heightens intra-regional competition with Vietnam and Malaysia, who are also aggressively targeting these diverted manufacturing and technology investments.
The rising cost of capital due to high global interest rates imposes a specific burden on the Indonesian government’s ability to fund crucial infrastructure projects necessary to support this potential FDI, directly affecting the pace of domestic Economic development. Regionally, the volatility from high-frequency trading forces all major ASEAN central banks (like the Bangko Sentral ng Pilipinas and Bank Negara Malaysia) to adopt a more synchronous and defensively hawkish Finance posture to stabilize their respective currencies against speculative attacks.
This creates a regional environment characterized by higher interest rates, which, while maintaining currency stability, may dampen private Business credit growth across the bloc. Ultimately, the success of Indonesia’s Economy in navigating this turbulent period depends on its ability to leverage its commodity exports and large domestic market (resilient household consumption) as a domestic buffer while successfully capitalizing on trade diversion opportunities through efficient regulatory and investment policy execution.
