Stock Market Decline as an Early Warning for the Real Economy
Mohammad Nur Rianto Al Arif
(Professor at UIN Syarif Hidayatullah Jakarta, Secretary General of the Central Board of the Indonesian Lecturers Association, Executive Board Member of ISEI Jakarta Branch, Executive Board Member of the Indonesian Association of Islamic Economists)
The decline of the Composite Stock Price Index (IHSG) is often treated by the government as an ordinary event. “Our economic fundamentals are strong" is the sentence that almost always appears whenever the stock market weakens.
The statement sounds reassuring, but that is precisely where the problem lies. When the government appears overly confident, the market reads the opposite signal: that there is a gap between claims of stability and the reality felt by investors.
When the IHSG declines, what actually happens is not merely a wave of stock sell-offs. There is a bigger story behind it—global uncertainty, domestic concerns, policy shifts, and political dynamics that shape perceptions of risk.
The stock market works like a nervous system that is highly sensitive to even the smallest signals.
This article attempts to read the decline of the IHSG not merely as a technical market symptom but as a complex economic-political phenomenon.
Why is the IHSG falling? Is this simply a healthy correction or a sign of structural problems? And just as important, what are the implications for the real economy and the broader public?
The government often describes a decline in the IHSG as a “normal correction.” Technically, that may be true. But it becomes problematic when corrections occur repeatedly and are accompanied by consistent foreign capital outflows.
The stock market is not merely a venue for trading financial assets; it is a space where expectations are priced in.
Investors buy shares not only because of today’s conditions but also because of their confidence in the future. For that reason, the IHSG is heavily influenced by sentiment.
When uncertainty rises, sentiment turns negative. Investors tend to become defensive, shifting funds into assets considered safer, such as government bonds, gold, or even strong currencies.
In such situations, stock sell-offs are rational, not merely emotional.
A decline in the IHSG often reflects rising risk perception. That risk may come from abroad—global interest rate hikes, geopolitical conflicts, or a slowdown in the world economy.
It may also stem from domestic factors, such as fiscal deficits, policy uncertainty, or heightened political tensions. The market does not wait for a crisis to fully materialize; the mere possibility can trigger a reaction.
One of the main drivers of the IHSG’s decline is the global environment, which remains unstable. The post-pandemic world faces layered challenges: inflation in advanced economies, tight monetary policies, and ongoing geopolitical tensions.
Rising global interest rates have placed significant pressure on emerging markets, including Indonesia.
When returns on assets in developed countries increase, global capital tends to flow back there. This phenomenon is known as capital outflow. As a result, the domestic stock market is pressured, the exchange rate weakens, and financing costs rise.
The IHSG is not immune to these dynamics. Although Indonesia’s economic fundamentals remain relatively intact, global capital flows often move without regard for specific national distinctions.
In the logic of global markets, Indonesia is still categorized as an emerging market—attractive when risks are low, but easily abandoned when uncertainty increases.
Beyond global pressures, domestic factors play an important role. The stock market is highly sensitive to government policies, especially those related to fiscal, monetary, and strategic sector regulations.
When policy direction is perceived as unclear or frequently changing, investor confidence can erode.
Although the state budget deficit ratio remains below the legal threshold, it faces structural challenges.
Social spending and populist programs have increased significantly, while productive spending often loses the narrative battle. Large programs are financed through debt, based on the assumption that economic growth will be strong enough to cover it.
The problem is that this assumption is increasingly questioned by the market. The debt-to-GDP ratio may still be manageable, but interest costs are rising sharply amid higher global and domestic interest rates.
This means future fiscal space is becoming narrower. Investors do not look only at today’s ratio but at future trends.
Sectoral policies also matter. Sudden regulatory changes, inconsistent implementation, or political tug-of-war often create uncertainty.
Investors are not allergic to regulation; they are allergic to uncertainty. When legal and policy certainty is questioned, the IHSG is often the first casualty.
In political years, market volatility tends to increase. This is not unique to Indonesia; it is a global pattern.
Elections, government transitions, or shifts in political coalitions always raise the same question: where will policy direction head?
The stock market dislikes ambiguity. When political contestation produces conflicting narratives, investors tend to hold back.
A wait-and-see approach can weigh on the IHSG, especially when accompanied by populist rhetoric perceived as risky for economic stability.
However, it is important to note that markets are not anti-democratic. They simply respond to signals. If the political process produces policy certainty and commitment to macroeconomic stability, confidence can recover quickly.
Conversely, if politics prolongs uncertainty, pressure on the IHSG may continue.
Not every decline in the IHSG should be interpreted as a crisis. Stock markets move in cycles. Corrections are a normal part of market dynamics and even necessary to keep valuations rational.
Problems arise when market declines are accompanied by deteriorating economic fundamentals.
To distinguish between a healthy correction and a crisis signal, several indicators must be observed: corporate earnings performance, banking sector stability, inflation, and purchasing power.
If these indicators remain relatively stable, the IHSG’s decline may reflect short-term sentiment.
But if the market downturn coincides with weakening consumption, rising non-performing loans, and worsening fiscal balances, concern is justified. In such a context, the IHSG is not merely reflecting fear; it is issuing an early warning.
There is a common assumption that a decline in the IHSG affects only upper-middle-class investors.
This assumption is not entirely accurate. The stock market is connected to the real economy through various channels: corporate financing, job creation, and consumer confidence.
When stock prices fall, corporate valuations decline. This can affect companies’ ability to expand, raise funds, or even sustain operations.
Over the long term, the impact can extend to employment and economic growth.
Moreover, a falling IHSG often influences broader public sentiment. When news about the stock market is dominated by negative narratives, perceptions of economic conditions also deteriorate.
Consumption may slow, investment may weaken, and a slowdown cycle can emerge. In other words, the stock market and the real economy influence each other, even if not always directly.
In facing a decline in the IHSG, the response of the government and authorities is crucial.
First, the government needs to stop oversimplifying the issue. The market does not demand guarantees that the IHSG will always rise; it demands assurance that risks are managed seriously.
Second, fiscal discipline must return as the central narrative. Populist programs must be accompanied by transparent and sustainable financing strategies. Without this, every spending promise becomes a new source of anxiety.
Third, economic communication must shift from defensive to dialogical. Markets cannot be silenced with slogans; they must be convinced with data and consistent policy. For investors, a decline in the IHSG is a test of rationality. Panic is often the greatest enemy. In many cases, decisions made under emotional pressure result in greater losses. History shows that market downturns are often followed by recovery. But recovery does not come automatically. It requires time, patience, and the ability to distinguish strong fundamentals from fragile ones.
For retail investors, financial literacy becomes increasingly important. Understanding that fluctuations are part of the game can reduce panic.
For institutional investors, discipline in long-term strategy is key to endurance. Ultimately, the IHSG reflects not only today’s conditions but also hopes and fears about the future. When the IHSG declines, the market is speaking—about perceived risks, unresolved uncertainties, and the need for policy clarity.
Listening to the market does not mean surrendering to investor logic but recognizing that trust is an economic asset as vital as natural resources or demographic bonuses. Without trust, sustainable growth is difficult.
A decline in the IHSG should be a moment for reflection—not to assign blame, but to strengthen the foundation. A healthy market is not one that always rises but one that is trusted. And once trust is lost, it takes a long time to rebuild.
This article was published in Kompas on Thursday, January 29, 2026.