FISCAL POLICY AND ITS IMPACT ON INDONESIA’S STOCK MARKET

By KUSNANDAR & CO., Attorneys at Law – Jakarta, INDONESIA

 

Fiscal policy is one of the key factors influencing the dynamics of Indonesia’s stock market. Government actions related to public spending, taxation, and budget deficit management not only affect macroeconomic health but also shape investor sentiment and stock price movements on the Indonesia Stock Exchange (IDX).

 

When the government increases expenditure on infrastructure, social programs, or economic stimulus, liquidity typically rises in the capital market. Fresh capital flowing into the economy can boost consumption, investment, and corporate growth, creating positive performance expectations for listed companies. This usually results in upward movements in major stock indices such as the Jakarta Composite Index (JCI).

 

Conversely, fiscal policies that increase taxes—especially corporate or income taxes—may pressure company profit margins. Investors view such measures as potential risks to corporate profitability, which can lead to selling pressure and stock price corrections. Similarly, fiscal austerity policies aimed at reducing budget deficits, while essential for long-term stability, often dampen domestic demand and negatively affect stock market sentiment in the short term.

 

Budget deficit and public debt management are also closely watched by market participants. A high deficit without a clear financing strategy can raise investor concerns about fiscal and currency risks, leading to higher risk premiums and government bond yields. This scenario often triggers negative reactions in the stock market, particularly in sectors sensitive to capital costs such as banking, property, and infrastructure.

 

Transparency and consistency in fiscal policy are critical to maintaining investor confidence. Policy uncertainty—such as sudden changes in tax rates or announcements of large expenditures without sufficient communication—can provoke volatility in the stock market. Effective coordination between the central government, Ministry of Finance, and capital market regulators is therefore essential to foster a conducive investment climate.

 

Foreign investors also pay close attention to fiscal policy as an indicator of economic stability and long-term investment attractiveness. Policies that support economic growth with sound fiscal management tend to increase capital inflows, while uncertainty or risky policies may trigger capital outflows and market declines.

 

At Kusnandar & Co., we advise clients to actively monitor fiscal policy developments and understand their implications for the capital markets. Responsive investment strategies, including portfolio diversification and sector exposure adjustments, can help mitigate risks while seizing emerging opportunities.

 

In summary, fiscal policy is a vital instrument influencing the stock market through multiple channels. Balancing economic stimulus with fiscal discipline forms a crucial foundation for the stability and growth of Indonesia’s capital markets. Investors who understand and anticipate these policies are better positioned to navigate market dynamics and achieve optimal long-term returns.

K&Co - September 17, 2025