The Composite Stock Price Index (IHSG) dropped sharply by 5% on Mar. 18, prompting the Indonesia Stock Exchange (IDX) to implement a 30-minute trading halt as part of a circuit breaker mechanism designed to prevent market panic and extreme volatility.
According to Dr. Rijadh Djatu Winardi, a UGM Faculty of Economics and Business (FEB UGM) academic, this sharp decline reflects market response, particularly from foreign investors, to economic and political uncertainty in Indonesia.
One of the main triggers is the unclear direction of government fiscal policy, including plans for increased state spending without solid funding sources.
“The state budget deficit in the first two months of 2025 has exacerbated these concerns,” he explained on Thursday, Mar. 20, 2025.
In addition, a massive sell-off of big-cap shares in state-owned banking sectors worsened the situation.
The market reacted negatively to controversial policies like the removal of the Micro Credit Program (KUR) and the Danantara regulations.
Unclear regulations and potential conflicts of interest have driven investors to reduce their exposure to the financial sector.
Another policy under scrutiny is the $28 billion annual free nutritious meal program (MBG).
Dr. Winardi acknowledges the social benefits of the program but warns it could threaten fiscal stability.
“If not properly managed, this program could increase the budget deficit, ultimately lowering investor confidence and triggering a stock sell-off,” he noted.
Furthermore, the formation of 80,000 village cooperatives with large loans from state-owned banks raised concerns over potential non-performing loans.
In terms of capital flows, net foreign sales on Mar. 18 reached IDR 2.48 trillion, while local buyers purchased big-cap shares worth IDR 2.5 trillion.
“The selling trend by foreign investors has been apparent since February, exacerbated by Indonesia’s stock rating downgrade by global financial institutions like Morgan Stanley and Goldman Sachs,” he said.
Moreover, the Consumer Price Index (CPI) recorded deflation of 0.48% (mtm) and 0.09% (yoy) in February 2025.
This deflation indicates weak consumer purchasing power, potentially pressuring the real sector, including property, automotive, and banking.
However, Dr. Winardi emphasized that while deflation reflects weakened purchasing power, it was not the primary cause of the IHSG drop on Mar. 18.
He believes that if deflation continues, its long-term impact will affect certain issuers that rely on domestic consumption.
During the COVID-19 pandemic, IDX also implemented trading halts several times to control market volatility, with the most significant occurring in March 2020 when IHSG plummeted due to investor panic.
Dr. Winardi highlighted the fundamental differences between the 2025 trading halt and the one during the pandemic.
In 2020, market turmoil was driven by global uncertainty due to the pandemic, while in 2025, the instability is more influenced by domestic economic policy uncertainty and negative investor reactions to new regulations.
In 2020, IDX and the Financial Services Authority (OJK) took additional mitigation measures, such as limiting short selling and allowing companies to buy back shares without shareholder approval.
“Conversely, in 2025, the market is more responsive to fiscal and monetary policies deemed uncredible by investors,” he added.
The trading halt mechanism plays a crucial role in calming market panic.
Dr. Winardi explained that the temporary trading suspension allows investors time to process information and avoid impulsive decisions.
The halt also opens opportunities for investors to employ a buy-on-weakness strategy, provided it is done carefully and gradually to avoid further losses from continued stock price declines.
He offered a few tips for investors facing market uncertainty.
“In every crisis, the market will rebound. It can be an opportunity, but caution is needed as no one knows when the market bottom will occur,” he advised.
He urged investors to stay calm and avoid making decisions based on emotions in volatile market conditions.
He emphasized that diversification is key to reducing investment risk.
Investors should spread their investments across various financial instruments, such as stocks, bonds, and mutual funds.
He suggested investors be extra cautious about short-term stock purchases during the IHSG decline.
“You can consider gradually buying stocks with strong fundamentals, and don’t forget to implement a disciplined cut-loss strategy to protect your investment capital,” he concluded.
Author: Triya Andriyani
Post-editor: Lintang
Image: Freepik