AI is really interesting, and it eases and simplifies (maybe even too much!) a lot of research on ongoing matters.
Recently, IDR-USD pair has dropped close to the AFC levels of 16.500 IDR : 1 USD, and many people are afraid of a repeat of the1998 financial crisis (which started from Thailand at the time).

While not exactly the same, the rapidly dropping Rupiah is a cause of concern. Here are AI answers explaining the situation and why it might happen. Read with a pinch of salt and do your own fact checking, of course.

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The Indonesian rupiah has been experiencing significant depreciation recently, reaching levels not seen since the Asian Financial Crisis in the late 1990s. As of March 25, 2025, several factors appear to be contributing to this decline:

Strong U.S. Dollar and Global Uncertainty: The U.S. dollar has been strengthening due to expectations of sustained high interest rates from the Federal Reserve, driven by a robust U.S. economy and potential policy shifts like tariffs under the incoming Trump administration. This global dollar strength tends to pressure emerging market currencies like the rupiah, as investors move capital toward U.S. assets offering higher yields.

Capital Outflows: Indonesia has seen significant capital flight, with foreign investors pulling funds from its stock and bond markets. For instance, on a single day in mid-March 2025, foreign investors sold off around 2.49 trillion rupiah ($150.68 million) in stocks. This outflow is partly linked to a loss of confidence in Indonesia’s economic stability and attractiveness compared to safer, higher-yielding markets like the U.S.

Domestic Economic and Political Concerns: Under President Prabowo Subianto’s new leadership, which began in late 2024, there are growing worries about fiscal management. Policies increasing the state's role in the economy, speculation about fiscal deterioration, and the setup of a new sovereign wealth fund (Danantara) have raised red flags for investors. Additionally, rumors of the resignation of respected Finance Minister Sri Mulyani Indrawati (later denied) added to market unease. Posts on X also suggest distrust in government intervention, such as plans for Bank Indonesia (BI) to purchase government debt, which could lead to money printing and further weaken the rupiah.

Bank Indonesia’s Policy Challenges: BI has been intervening in currency markets to stabilize the rupiah, describing its efforts as “bold” in mid-March 2025. However, despite these interventions and maintaining the benchmark interest rate at 6% in December 2024, the rupiah has continued to slide, hitting levels around 16,640 IDR/USD recently. BI’s foreign exchange reserves dropped by $1.4 billion in September 2024 alone, reflecting the cost of defending the currency amid dwindling reserves.

Deflationary Pressures and Economic Slowdown: Indonesia is facing signs of deflation, with consumer price index declines linked to policies like electricity discounts under Prabowo. This, combined with weakened purchasing power and reduced consumption, signals an economic slowdown, further eroding confidence in the rupiah. Posts on X highlight fears of a “spiraling down” economy, with weakened revenue for companies and rising operational costs due to a depreciating currency.

External Trade Dynamics: While Indonesia’s commodity exports (e.g., palm oil, gas) historically provided a buffer, global trade uncertainties—such as potential U.S. tariffs—and a slowdown in trading partners’ economies could reduce export demand, negating any benefit from a weaker rupiah. Research suggests that a rupiah depreciation doesn’t significantly boost exports due to high import content in export goods, leaving the economy vulnerable.

The depreciation of the Indonesian rupiah in March 2025 invites comparisons to the Asian Financial Crisis (AFC) of 1997-1998, when the currency suffered a catastrophic collapse. While there are some parallels, the current situation differs in scale, causes, and economic context. Here’s a breakdown of how the two periods compare:

Similarities
Rupiah Depreciation: During the AFC, the rupiah plummeted from around 2,500 IDR/USD in mid-1997 to a peak of 16,650 IDR/USD by June 1998—a drop of over 80%. In March 2025, the rupiah has recently hit levels around 16,640 IDR/USD, a symbolic threshold that echoes the AFC’s lows and triggers historical alarm bells for Indonesians and investors.

Capital Flight: Both periods feature significant foreign investor exits. In 1997-1998, capital outflows were rampant as confidence in Asian markets evaporated. Similarly, in 2025, foreign investors have sold off Indonesian assets—e.g., 2.49 trillion rupiah ($150.68 million) in stocks on a single day in mid-March—reflecting unease about economic stability.

External Pressures: The AFC was exacerbated by a strong U.S. dollar and rising U.S. interest rates, which drained liquidity from emerging markets. In 2025, the rupiah faces pressure from a robust U.S. dollar, bolstered by high Federal Reserve rates and anticipated Trump-era policies like tariffs, pulling capital toward the U.S.

Policy Uncertainty: Political and economic mismanagement played a role in the AFC, with Indonesia’s Suharto regime criticized for cronyism and delayed reforms. In 2025, concerns about President Prabowo Subianto’s fiscal policies—such as increased state intervention and rumors of debt monetization—have similarly unsettled markets.

Differences
Scale and Speed of Collapse: The AFC saw a far more rapid and severe rupiah crash. Within months, the currency lost over 80% of its value, whereas the 2025 depreciation, while sharp (from around 15,500 IDR/USD in late 2024 to 16,640 now), reflects a slower decline of roughly 7-10% over a few months. The current drop is significant but not yet at the AFC’s apocalyptic levels.

Underlying Causes: The AFC was triggered by structural weaknesses—massive private-sector foreign debt (much of it short-term and unhedged), banking sector fragility, and a fixed exchange rate regime that collapsed under speculative attacks. In contrast, 2025’s crisis is more about external pressures (U.S. dollar strength, global uncertainty) and domestic confidence issues (policy shifts, capital outflows) rather than a systemic debt crisis. Indonesia’s banking sector today is healthier, with stricter regulations post-1998.

Economic Fundamentals: During the AFC, Indonesia’s economy contracted by 13.1% in 1998, with rampant inflation (peaking at 77%) and widespread corporate defaults. In 2025, the economy shows signs of slowdown and deflationary pressure (e.g., consumer price declines from electricity discounts), but there’s no evidence yet of a full-blown recession or hyperinflation. Foreign exchange reserves, while declining ($1.4 billion drop in September 2024), stood at $149.9 billion then—far higher than the AFC’s critically low levels.
Government Response: In 1997-1998, Indonesia’s response was chaotic, with delayed IMF intervention and political upheaval (Suharto’s fall in May 1998). In 2025, Bank Indonesia (BI) has been proactive, intervening “boldly” in currency markets and maintaining a 6% benchmark rate as of December 2024. The government, while facing criticism, isn’t in the same state of paralysis as during the AFC.

Global Context: The AFC was a regional contagion, with Thailand’s baht collapse sparking panic across Southeast Asia. In 2025, Indonesia’s woes are more isolated, tied to global dollar strength and domestic policy rather than a broader Asian crisis. Neighboring currencies like the Malaysian ringgit or Thai baht aren’t collapsing in tandem as they did in 1997.