THE rupiah exchange rate has weakened to an alltime low. Before rising to below Rp 18,000 per USD, it plunged to Rp 18,190 per USD on June 8, 2026. The rupiah rebounded after Bank Indonesia (BI) went all-out to save the rupiah through open market operations, foreign exchange market intervention, and interest rate policies. During the first five months of 2026, foreign exchange reserves were depleted by USD 11.5 billion, reaching USD 144.9 billion at the end of May 2026, and are expected to decrease by another USD 2.3 billion in June. Bank Indonesia (BI) also raised its benchmark interest rate three times during June. The BI rate, which had been at 4.75% since September 2025, was raised to 5.25%, 5.50%, and 5.75% from May to June 2026.

            The government claims the exchange rate depreciation was caused by the strengthening of the USD as a result of the Israel-United States-Iran war that erupted on February 28, 2026, and the Federal Reserve’s high interest rate policy. However, the rupiah also depreciated against other currencies, including the Singapore dollar, Australian dollar, Japanese yen, Chinese yuan, Thai baht, and Malaysian ringgit. The rupiah even weakened against the currencies of lower-tier countries like Nigeria and Ethiopia. Tragically, the rupiah exchange rate against the kina, Papua New Guinea’s currency, plummeted from Rp 3,802 per kina at the start of the year to Rp 4,100 per kina by the end of June.

            This means that there are interacting domestic factors influencing the weakness of the Garuda currency. Among them is declining market confidence in Indonesia. Therefore, in addition to the rupiah’s depreciation, the Jakarta Composite Index (JCI) also plummeted from Rp 9,133 in mid-January to Rp 5,342.14 on June 8, 2026. Foreign investors sold rupiah-based assets due to the emergence of issues regarding the collapse of Bank Indonesia’s independence, issues with transparency and the quality of the capital market, and concerns about fiscal sustainability due to the widening state budget (APBN) deficit.

            The APBN is under pressure from several large expenditures. The first is the ambitious implementation of National Strategic Projects (PSN) that require significant budgets, including the Free Nutritional Meals (MBG) program and the Red and White Village Cooperative (KDMP). The second is the burden of fuel subsidies has ballooned due to rising oil prices since the outbreak of the Iran war. The third is the burden of debt interest payments, which will reach Rp 599.44 trillion in 2026.

            Meanwhile, the state budget (APBN) is being held hostage by mounting government debt, reaching Rp 9,637.90 trillion in 2025. In the first five months of 2026, the government has already taken on Rp 386 trillion in new debt, bringing the government debt to Rp 10,023.9 trillion as of May 2026.

            Unfortunately, amid global investor scrutiny and public criticism, the government remains stubbornly pursuing costly populist programs. Meanwhile, attracting debt through national securities (SBN) has become less attractive due to investor concerns about the rupiah exchange rate. Bank Indonesia (BI) has become “the fence” to buy up Rp 75.2 trillion in SBN, a 19.6% increase from the first quarter of 2025. Attracting foreign capital is also challenging, as investors are wary of fiscal risks.

            In a climate of acute fiscal thirst, the government has quietly resorted to “drunken tactics.” Through the Danantara Investment Management Agency (BPI), the government is offering “Patriot Bonds” and “Merah Putih Bonds,” which relax scrutiny of the origins of investor funds. Furthermore, illicit funds used to purchase the bond portfolio will be protected from legal prosecution. The legal framework, prepared without public discussion, is Law Number 4 of 2026 concerning Amendments to the Law on the Development and Strengthening of the Financial Sector (P2SK), which was passed on June 4, 2026, but only circulated to the public two weeks later.

            Article 50A paragraph 5 states that the state guarantees and protects the purchase of special debt instruments from public prosecution, special criminal penalties, including taxation, and civil lawsuits. This means that “illicit” money can be laundered through these instruments and rendered “legal” because it is protected by the law.

            According to Wijayanto Samirin, an economist from Paramadina University, the revised P2SK Law is an unlawful legal product. This is because the legal umbrella contradicts the provisions of the Anti-Money Laundering and Countering Financing of Terrorism Act, a set of financial regulations aimed at preventing money laundering and disrupting the flow of terrorist funds. As a result, Indonesia has become a haven for illegal money, similar to the Cayman Islands, Mauritius, and the British Virgin Islands. “It’s not just about losing money. We’re also losing the integrity of our capital. Because the state is consciously facilitating the use of the proceeds of prostitution, narcotics, and corruption to develop Indonesia,” Wijayanto said in a public discussion on June 24, 2026.

            Wijayanto added that the law also has the potential to hinder Danantara’s collaboration with other global Sovereign Wealth Funds (SWFs). This is because the P2SK Law contradicts the Santiago Principles, a set of global guidelines consisting of 24 generally accepted principles and practices for managing SWFs or Sovereign Wealth Funds. The amended P2SK Law also undermines institutions that have been painstakingly built, such as the independence of Bank Indonesia (BI), the Financial Services Authority (OJK), the Financial Transaction Reports and Analysis Center (PPAK), and the Corruption Eradication Commission (KPK).

            The challenge is how to prevent the banking industry from becoming a reservoir for “money laundering” proceeds. After all, banks are the heart of the economy, pumping funds throughout all sectors and activities. “Therefore, all financial authorities, especially the Financial Services Authority (OJK) and the Financial Transaction Reports and Analysis Center (PPATK), must closely monitor the inflows into banks to determine whether they are clean or not. Financial services sector players must strictly enforce anti-money laundering programs,” economist Ryan Kiryanto told Infobank in late June.

            The problem is that “the doer of money laundry action is BPI Danantara”, as the superholding and shareholder of Himbara. It’s normal for the public to ask: will Himbara remain compliant with anti-money laundering regulations and implement Know Your Customer (KYC) principles when its owners can siphon off “hot money” that can be deposited at any time in their own banks?

Get Ready For The Interest War

            The world is eagerly awaiting an end to the Israel-US-Iran war. If a ceasefire is reached on June 23, 2026, it could truly lead to a peace agreement, but another war continues: the trade war. In fact, a new war has just begun: the interest war. This is because the impact of the war has triggered a surge in global energy prices and inflationary pressures. Central banks worldwide have taken steps to tighten monetary policy by raising interest rates to maintain currency stability and curb inflation.

            The Bank of Japan raised its short-term policy rate from 0.75% to 1%. The European Central Bank raised its interest rate last June by 25 basis points to 2.25%, the first increase in nearly three years. The Reserve Bank of Australia has raised its interest rate three times this year, reaching 4.35%. Bank of Canada maintained its benchmark interest rate at 2.25%. Similarly, the Federal Reserve also maintained its fed funds rate at 3.50%-3.75%.

            Meanwhile, Bank Indonesia (BI) raised the BI rate three times by 100 basis points in June 2026 to 5.75%. The BI rate hike is a double-edged sword. It may prevent the dollar from rising again above Rp 18,000, but it also has a negative impact on the domestic economy. According to Infobank Research Bureau, in Infobank’s Ratings of 105 Commercial Banks 2026, the tightening of monetary policy has these three transmission effects.

            The first is banks will raise deposit interest rates, triggering an interest rate war in the second half of 2026. Banks, especially the StateOwned Banks Association (Himbara), must anticipate the government’s withdrawal of their Excess Budget Balance (SAL) funds held with Himbara. The government has confirmed the withdrawal will be phased in for reabsorption by BI. By the last quarter of 2025, the government had deposited Rp 300 trillion in SAL funds in banks, with another Rp 100 trillion in Bank Indonesia. If Himbara, which controls 45%-50% of third-party funds (DPK), raises interest rates, it could put pressure on bank liquidity, particularly those in KBMI 1 and 2.

            The second is the business sector will bear the brunt of increased working capital and investment costs. Banks will strive to maintain their net interest margin (NIM), thus shifting the increased cost of funds to borrowers by raising lending rates.

            This increase in loan interest rates has further pressured businesses, already hit by the appreciation of the US dollar since the beginning of the year, which has increased the costs of raw materials and auxiliary materials. Coupled with weak demand, businesses will seek efficiency measures, including layoffs.

            The third is the public, especially the middle class, must pay the high cost of monetary tightening to prevent the rupiah from continuing its freefall. Their pockets are not only being eroded by rising debt interest payments, but also by rising fuel prices and various burdensome policies, such as taxes. The middle class is the government’s primary target for tax increases.

            The decline in the middle class is also likely to continue. The Central Statistics Agency (BPS) recorded a decline of more than 10 million people in the middle class from 57.33 million people (21.45%) in 2019 to 47.85 million people (17.13%) in 2024. This represents a decline of more than 10 million people over five years. In 2025, the middle class will shrink by another 1.1 million to 46.7 million people, as reported by the Mandiri Institute. The decline in the middle class is predicted to continue due to rising fuel prices, rising mortgage interest rates, and shrinking formal employment opportunities.

            The micro, small, and medium enterprises (MSMEs) sector, which workers rely on to earn a living in the informal sector, is also experiencing a downturn. For the first time in history, MSMEs credit contracted in 2025 by 0.27% to Rp 1,505.31 trillion. However, during the same period, non-MSMEs credit grew by double digits, resulting in total bank credit growth of 9.75%. The decline in MSMEs credit is also accompanied by a decline in quality. In 2025, the gross non-performing loan (NPL) ratio for MSMEs credit reached 4.33%, significantly higher than the overall NPL of 2.21%. As of May 2026, MSMEs credit grew slightly, only 0.6% to Rp 1,509.5 trillion, or 17.23% of total credit, which reached Rp 8,759 trillion.

            The optimism surrounding the credit outlook that emerged when Bank Indonesia (BI) announced an 11% increase in credit in May 2026 could reverse course. Banks will face a perfect storm in the second half of 2026, requiring stronger preparedness to weather tightening liquidity, a weakening rupiah hovering around Rp 17,800 – Rp 18,200 per USD, rising fuel prices, and declining purchasing power due to rising prices.

            The government claims the exchange rate depreciation was caused by the strengthening of the USD as a result of the Israel-United States-Iran war that erupted on February 28, 2026, and the Federal Reserve’s high interest rate policy. However, the rupiah also depreciated against other currencies, including the Singapore dollar, Australian dollar, Japanese yen, Chinese yuan, Thai baht, and Malaysian ringgit. The rupiah even weakened against the currencies of lower-tier countries like Nigeria and Ethiopia. Tragically, the rupiah exchange rate against the kina, Papua New Guinea’s currency, plummeted from Rp 3,802 per kina at the start of the year to Rp 4,100 per kina by the end of June.