| In many ways, this ought to be Indonesia's moment. Against a backdrop of escalating geo-economic competition between the US and China, Southeast Asia's biggest economy has longstanding ties to America and more recently has welcomed large-scale Chinese investment. Newly elected President Prabowo Subianto made Beijing his first overseas stop in November, where Chinese leader Xi Jinping gushed about the idea of the two nations leading the "Global South." Days later, Subianto—a former general who once trained at Fort Bragg, North Carolina—apparently "thrilled" American business leaders when he turned up to meet them at the Four Seasons Hotel in Washington. Indonesia Investment Minister Rosan Roeslani said executives from Chevron, General Electric and other corporate heavyweights heard a message centered on reducing red tape. Prabowo encouraged the delegation to contact him directly if there are any problems. But in recent weeks, it's all gone pear-shaped. Tuesday, Indonesia's rupiah hit its weakest since the Asian financial crisis, a day after the main stocks index closed 18% down from the peak reached in September. Investors are increasingly worried that Prabowo, far from seizing the moment, is effectively winding back a slew of structural reforms that Indonesia painfully implemented in the wake of that late 1990s unpleasantness.  Indonesia President Prabowo Subianto at the presidential palace in Jakarta on Feb. 20. Photographer: Bay Ismoyo/AFP This week in the New Economy | Prabowo won last year's election promising he'd continue with the pro-business policies of his predecessor, Joko Widodo. But his landslide win, which included an overwhelming parliamentary majority, was also based on boosting spending on social welfare — and that fixation is now one reason markets are in turmoil. After the Asian crisis, which saw the downfall of dictator Suharto (Prabowo's late father-in-law), Indonesia worked hard to earn the trust of global investors, imposing a fiscal-deficit limit of 3% of GDP. The central bank was granted independence. Economic officials for years bombarded confabs of big investment banks and the financial-TV airwaves, preaching the new mantra of credibility in public finances. Jakarta sought, and won, sovereign credit-rating upgrades. Indonesia went from requiring a bailout from the International Monetary Fund — involving an infamous photo with the then-IMF chief — to holding a BBB grade today at S&P Global Ratings, two notches into investment-grade territory.  Indonesian President Suharto, right, with International Monetary Fund Managing Director Michel Camdessus in Jakarta in 1998. Photographer: Agus Lolong/AFP Perhaps no official did more of an economic sales job than Sri Mulyani Indrawati, who has served as finance minister for most of the past two decades. Rumors last week that she would resign sent Indonesian stocks tumbling the most in three years and forced Indrawati herself to dispel the speculation. The worry is that the tight rein on spending is being abandoned. Since taking office, the 73-year-old Prabowo has implemented a free lunch program for students costing $30 billion a year—the equivalent of 14% of Indonesia's entire 2024 budget. The president now wants to expand the program to include 83 million recipients by year-end, a massive increase from an earlier target of 6 million by August. Other agenda items have sowed concern, from plans to dilute the central bank's independence and an aggressive posture toward Apple's iPhone sales to the creation of a controversial sovereign wealth fund. That fund, known as Danantara, is set to take control of Indonesia's state-owned enterprises and has a sweeping mandate to invest across industries. It reports directly to Prabowo, raising questions about oversight. "Prabowo's priorities are very clear: he wants to build some sort of legacy — and the legacy that he wants to build probably is not something that markets or independent viewers see as urgent for Indonesia," says Achmad Sukarsono, the lead analyst for Indonesia at Control Risks Group.  Demonstrators protesting a revision to the armed forces law in Jakarta on March 20. Photographer: Bay Ismoyo/AFP Another post-Asian financial crisis reform may also be at risk: Indonesia's hard-won democratic credentials. Prabowo this month pushed through new legislation allowing active-duty military personnel to assume a broader range of civilian positions, sparking student protests. A central bank official saw the need this week to state that "the current condition is still far from that of the 1998 crisis." The new rules on military officers substantially differ from the so-called dual-function that gave the military comprehensive powers under Suharto. Still, the move by Prabowo was criticized by rights groups as a stark example of democratic backsliding. The market and civil unrest puts Prabowo's objective of boosting Indonesia's economic growth to 8% out of reach, economists say, with a figure closer to 5% more likely for this year. Beyond that, Indonesia's promise as a stable base for global investors in volatile geopolitical times is at risk. Prabowo "has become increasingly more powerful, and there has been no resistance," Sukarsono says. —Philip Heijmans | 
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