Writer: Hardianto Widyo Priohutomo, M.I.P. (Director of Southeast Asia Studies, InMind Institute)
Editor: Fadhlan Aldhifan, M.I.P. (Head of Publishing, InMind Institute)
At a tofu and tempeh production cluster in Bandung Regency in June 2026, artisans were doing something that might seem absurd but had quietly become a survival strategy: shrinking the size of the tempeh they sold. Not for lack of skill, but because approximately 95 percent of the country’s soybean supply still depends on imports, and prices have kept climbing as the rupiah weakens. That, in essence, is the human face behind the exchange rate figures flickering on financial market screens. The rupiah’s fall materialises as thinner slices of tempeh, scarcer side dishes, and kitchens that struggle to stay warm.
On 9 June 2026, the rupiah briefly touched its weakest level on record, at Rp18.209 per US dollar, a threshold no one wished to see broken. Yet the 2026 State Budget had pegged the exchange rate assumption at only Rp16.500 per dollar. A gap of more than a thousand rupiah per dollar between the government’s projection and market reality is not merely a technical miscalculation. It reflects the chasm between state optimism and the everyday reality confronting ordinary people in traditional markets across the country.
Yet our analysis would be dangerously shallow if it stopped at exchange rate figures and currency movement charts. The weakening of the rupiah is, first and foremost, a matter of political economy, concerning how the state distributes the burden of crisis, who bears the heaviest load, and whether state capacity is sufficient to protect those most vulnerable.
When the Exchange Rate Becomes a Burden for Ordinary People
The rupiah’s depreciation in 2026 has been driven by a convergence of external pressures: a strengthening US dollar index, yields on US government bonds approaching 4.7 percent, geopolitical tensions in the Middle East, and global crude oil prices that have remained well above the 2026 State Budget assumption. These technical explanations are valid, but they must not become a shield behind which deeper structural failures at home are concealed.
The sector feeling the most direct pressure is the micro, small, and medium enterprise (MSME) sector, the backbone of Indonesia’s economy that absorbs more than 97 percent of the national workforce. Data from Bank Indonesia show that working capital credit for MSMEs, which contracted by 4 percent year-on-year in March 2026, contracted further by 4.1 percent year-on-year in April 2026. These negative figures are not merely banking statistics. They mean that small business owners are increasingly unwilling or unable to access financing to sustain, let alone expand, their enterprises.
Currency depreciation does not only raise industrial production costs. It also risks triggering capital outflows that hamper business expansion and ultimately threaten job cuts. At the same time, the impact of rupiah weakness on food prices ranges from 2 to 8 percent depending on the commodity, a squeeze on purchasing power that strikes consumers while simultaneously weakening demand for MSME products themselves. This vicious cycle, rising production costs, falling purchasing power, shrinking revenues, looming layoffs, is a recurring narrative in political economy, and the state should by now know the script well.
Lessons from Neighbours: Thailand, Vietnam, and Malaysia
This is precisely where a comparative Southeast Asian perspective becomes relevant. Currency crises are not unique to Indonesia. What differs is how the state responds, and that response determines the trajectory of recovery.
Thailand, once the epicentre of the 1997 Asian financial crisis, transformed bitter lessons into policy foundations. After the crisis, Bangkok developed the One Tambon One Product programme as a community-based MSME resilience initiative, while simultaneously promoting domestic import substitution for raw materials in small-scale production sectors. When the baht came under pressure, a more self-reliant domestic production structure helped absorb the shock and dampen the transmission of exchange rate volatility to small businesses.
Vietnam took a different but equally instructive path. Hanoi consistently pushed the downstream development of labour-intensive light manufacturing exports, so that a weakening dong actually enhanced the competitiveness of small and medium exporters. When the currency fell, Vietnam was able to convert pressure into an export incentive. That outcome is only possible if the domestic production structure has been prepared long before the crisis arrives.
Malaysia, through the SME Bank mechanism and the SME Corp programme, built a dedicated financing ecosystem for small businesses that is relatively insulated from foreign exchange market turbulence. Kuala Lumpur also implemented subsidy-based hedging policies for MSMEs dependent on imported raw materials in strategic sectors. The result: when the ringgit came under pressure, the small business sector did not face the kind of existential shock that has repeatedly struck Indonesia.
The common thread running through all three countries is that domestic economic resilience is not born during a crisis. It is built long before one arrives. It is the product of a state with strong capacity to plan, institutionalise, and implement structural protection policies over time.
The Shadow of 1997 and the Amnesia of Policy
We cannot discuss currency pressures without looking back at 1997 and 1998. The Asian monetary crisis of that era did not simply devastate Indonesia’s economy. It brought down the political legitimacy of the New Order regime. The rupiah’s collapse from Rp2.400 to more than Rp16.000 per US dollar within a matter of months did not only destroy corporate balance sheets. It incinerated public trust in the state. Mass layoffs followed, food prices spiked, social unrest exploded, and a regime fell.
The crisis of 1997 taught us that currency depreciation left unanswered by genuine commitment to ordinary people does not merely generate economic damage. It erodes the social contract between the state and its citizens. This is what political scientists call a legitimacy crisis: when the state loses its distributive capacity, it also loses its moral authority to govern.
The question for 2026 is this: to what extent have those lessons truly been internalised?
State Capacity as the Decisive Variable
As a political observer, I want to assert one core argument that is frequently absent from mainstream economic discussions: the weakening of the rupiah is a test of state capacity, not merely a test of monetary policy.
State capacity, the ability to plan, implement, and enforce policy effectively, is the variable that determines whether external pressure transforms into social crisis or is instead managed into an opportunity for structural transformation. CELIOS Director Bhima Yudhistira has warned that the condition of domestic economic fundamentals and government communication both shape investor perceptions. This is a reminder that public and market confidence in the state is not merely a psychological variable. It is a structural factor that determines stability.
When the state fails to demonstrate its capacity to protect the MSME sector, whether through emergency financing policies, stabilisation of imported raw material prices, or a responsive social safety net, it does not only leave ordinary people to bear the burden of crisis alone. It is also quietly eroding its own political legitimacy. In a democratic system, legitimacy that is eroded constitutes a real threat to governmental stability itself.
Minister for MSMEs Maman Abdurrahman has acknowledged the impact of the rupiah’s weakening on several MSME sub-sectors and stated that the government, in coordination with the Ministry of Finance and the Ministry of Trade, continues to pursue mitigation efforts. That acknowledgement deserves recognition, but acknowledgement is not policy. What is needed is a concrete budgetary commitment, acceleration of domestic import substitution programmes for strategic MSME raw materials, and reform of financing access that goes beyond citing KUR figures to genuinely reach the informal MSME segment that remains untouched by formal banking.
A State That Is Present, Not Merely Reactive
In the end, this piece is not about the exchange rate alone. It is about a more fundamental question: when the global economy is in turmoil, where do ordinary people turn for shelter?
The ideal answer is: to the state. Not a reactive state that only moves once crisis has already erupted into social unrest, but an anticipatory state that has built structures of domestic economic resilience long before the rupiah is dragged down by a strengthening dollar. Thailand, Vietnam, and Malaysia did not win their economic resilience at the table of crisis management. They won it at the table of policy planning, years in advance.
Indonesia possesses all the foundations to do the same: the largest domestic market in Southeast Asia, an extraordinarily large MSME base, and natural resources that ought to be processed into an industrial foundation grounded in local raw materials. What we need is not merely exchange rate stabilisation through Bank Indonesia interventions in the foreign exchange market. What we need is the political courage to undertake structural reform: building raw material self-sufficiency, strengthening domestic supply chains, and making MSMEs a pillar of the economy that is genuinely protected rather than simply invoked as rhetoric in official speeches. The shrinking tempeh in Bandung is the perfect metaphor. It is not a story about the failure of artisans. It is a story about the failure of the state to provide the foundations that would spare them from having to diminish what they produce simply in order to survive. History has taught us that people who feel abandoned by their state do not remain silent indefinitely. And in a democracy, their voice is a bill that always arrives on time.
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