Is Indonesia on the Verge of a Major Economic Crisis Like 1998 in 2025-2026?

The echoes of 1998 still haunt Indonesia’s collective memory. In less than a year, Southeast Asia’s largest economy collapsed under the weight of a collapsing rupiah, runaway inflation, and a wave of bankruptcies that wiped out businesses and jobs at a staggering scale. The scars remain vivid—not just in the history books, but in the DNA of Indonesian institutions, corporations, and households.

As the year 2025 unfolds, questions are again beginning to bubble to the surface. With the rupiah flirting near 16,500 per USD, inflation inching upwards, and political uncertainty hanging post-election, some wonder: is Indonesia once again tiptoeing toward the economic abyss? Is this déjà vu—or merely a passing storm?

To answer that, we must look not just at surface-level numbers, but at the deep, structural currents shaping Indonesia’s economy. What’s holding us together? What could break us? And more importantly—what does the future look like?

Let’s begin with the big picture. On the surface, today’s Indonesia looks far more resilient than it did in 1997. In fact, comparing the two eras shows both cautionary parallels and reassuring contrasts.

Indicator	1997 (Pre-Crisis)	1998 (Crisis)	2024 (Current)
Inflation	6.5%	77.6%	3.5%
GDP Growth	4.7%	-13.1%	4.8%
Rupiah/USD	~2,500	~16,000	~16,500
Foreign Debt/GDP	~60%	~150%	~39%
Forex Reserve	$18B	~$10B	$140B

While the rupiah’s value mirrors that of 1998, the underlying structures are very different. In 1998, foreign-denominated corporate and government debt ballooned out of control. Today, most of Indonesia’s government bonds are issued domestically and in rupiah, giving the state a better handle on debt management. The banking system, once a wild west of cronyism and corruption, is now under tighter regulatory oversight by OJK and Bank Indonesia.

But does that mean we’re out of danger? Not quite. In fact, we’re heading into new, more complex territory.

One area of growing vulnerability is the consumer. Indonesia’s middle class—once hailed as the future of the economy—is now stretched thin. While official inflation stands at 3.5%, the “felt inflation” for many middle- and lower-income households is much higher, especially for food, transport, and housing.

Food inflation has topped 9% in some urban areas. Electricity subsidies are being peeled back. Healthcare costs continue to rise. Meanwhile, household debt is increasing, with consumer credit growing at 11.3% YoY. Many families are one emergency away from financial instability.

Combine this with the weakening rupiah and rising global interest rates, and you’ve got a volatile cocktail. Imports become more expensive, pushing prices higher. The government faces pressure to intervene, but fiscal space is tightening. Debt servicing already consumes nearly 19% of the national budget. And this is an election aftermath year—public expectations are high, but maneuvering room is limited.

What does this mean at the grassroots level? For one, a potential dip in consumer confidence. According to recent Indonesia market survey, consumer spending is flattening—especially in non-essential goods. Retailers report increased sensitivity to price changes and a shift toward private labels or cheaper alternatives.

This phenomenon, known as “downtrading,” is an early warning signal. It suggests the middle class is bracing for tougher times. For small businesses, it’s even harder. Micro, small, and medium enterprises (MSMEs)—which account for over 60% of employment—are being squeezed by both higher input costs and weaker demand.

Labor market dynamics further complicate the picture. On paper, unemployment is stable at around 5.3%. But underemployment, especially among youth, is quietly growing. Gig work is masking the fragility of employment quality. Many young workers now juggle multiple informal jobs just to stay afloat.

Wages have not kept pace with inflation in many provinces. Real purchasing power is eroding. The informal sector, which still accounts for 58% of total employment, offers little social protection. One bad harvest, one price shock, or one medical emergency—and a family could fall below the poverty line again.

The deeper concern here is social sentiment. Economic crises are not only born from bad numbers—they’re born from collapsing confidence. The moment people stop believing in the stability of their jobs, savings, and government safeguards, a recession can turn into a spiral.

Externally, the risks are just as formidable. China’s economic slowdown is already impacting Indonesia’s commodity exports. Palm oil, nickel, and coal—major foreign exchange earners—are seeing price and demand pressures. Meanwhile, ongoing tensions in the South China Sea and the potential for trade realignments are casting shadows on regional supply chains.

Then there’s the US Federal Reserve. With US interest rates staying high, capital is flowing back to “safe havens,” leaving emerging markets like Indonesia vulnerable. Foreign portfolio outflows in 2024 reached $4.2 billion. The rupiah has taken the hit, slipping gradually but consistently over the past two years.

If these trends persist—or intensify—Indonesia could face a perfect storm of capital flight, cost-push inflation, and a confidence crunch. Not a 1998-style collapse, but a painful slowdown that feels personal for millions.

So what are the possible outcomes? Let’s outline three scenarios.

1. Optimistic Scenario: Resilience Holds
Indonesia weathers the storm thanks to strong domestic demand, robust banking system, and a disciplined monetary response. Inflation peaks at 6%, then stabilizes. GDP growth slows to 4.3% in 2025, but rebounds to 5.2% by 2027. The government recalibrates subsidies and ramps up IKN and infrastructure spending to stimulate internal demand.

2. Baseline Scenario: Mild Recession, Uneven Recovery
The rupiah slides past 17,500, inflation creeps toward 7%, and consumer spending dips significantly. MSME closures rise. Youth underemployment becomes politically sensitive. Fiscal consolidation limits aggressive interventions. Recovery begins by late 2026, but it’s fragile and uneven across sectors.

3. Pessimistic Scenario: Crisis of Confidence
A geopolitical event shocks commodity prices. The rupiah drops beyond 18,000, prompting BI to hike rates sharply. Credit dries up. Businesses delay investment. Consumers pull back. The middle class begins to deleverage rapidly, triggering a slowdown in retail, automotive, and housing. Growth plunges below 3%. Social unrest flares in key urban areas.

Which scenario is most likely? Based on current data and forward indicators, we’re tilting toward the baseline scenario. Indonesia won’t collapse—but it won’t cruise either. Growth will be slower, inequality will worsen, and the middle class may begin to shrink. But buffers—both institutional and economic—are still strong enough to prevent a full-blown meltdown.

Still, we must not be complacent. Crises rarely look the same twice. 1998 was about institutional failure and foreign debt. 2025 could be about middle-class fragility, digital dislocation, and global decoupling.

What should Indonesians do to prepare?

Businesses should double down on listening. Tap into Indonesia market research expert services. Don’t just assume your consumer is the same as last year. Inflation, fear, and uncertainty change behavior. Leverage Indonesia market survey data to identify which segments are trading down, and where new frugal innovation can win. From sachetization to rental models, flexibility is key.

Consumers must be cautious but not paralyzed. Build buffers—reduce credit exposure where possible. Lean into local brands or community-based commerce. Seek out resources like Indonesia consumers insight to understand what’s happening in the market, and anticipate change rather than react to it.

Policymakers need to resist the urge to over-promise. Focus instead on restoring trust. Use targeted subsidies and expand social protection in the informal sector. Invest in youth employment. Expand the use of Indonesia mystery shopper programs to ensure retail compliance and inflation monitoring. Communicate clearly—and often.

In conclusion, the question isn’t “Will 1998 happen again?” It’s: “What kind of crisis might happen next—and are we paying attention?”

Indonesia is not on the edge of collapse. But it is walking a tightrope across three fault lines: consumer sentiment, external shocks, and political overextension. How we respond in the next 18 months—collectively, institutionally, and individually—will determine whether we stumble or stay upright.

So no, it’s not 1998. But let’s not wait for it to feel like it.

This is the moment for Indonesia’s businesses, citizens, and government to lead—not just survive. Adaptability, data, and trust are the three currencies that will matter most in 2025 and beyond.

And if you're still unsure where the market is headed? Start by listening to the people. Because they always know before the numbers catch up.