Indonesia’s Stock Boom, Currency Crash and Insurance Scandals

On October 27, 1988, President Suharto’s economic technocrats unveiled a sweeping financial deregulation package known by its Indonesian acronym, Pakto 88 (Paket Oktober 1988), followed two months later by the Pakdes 88 capital-market reforms. Designed to wean Indonesia off dwindling oil revenues by mobilizing private domestic and foreign capital, the reforms slashed the minimum capital required to open a private commercial bank to just 10 billion rupiah ($5.8 million) and opened the moribund Jakarta Stock Exchange (Bursa Efek Jakarta, or BEJ) to foreign institutional investors. Within five years, a sleepy trading floor that had listed just 24 companies for nearly a decade exploded into one of Southeast Asia’s hottest emerging markets, with nearly 300 listed corporations and a surging Jakarta Composite Index (IHSG). ^[1]

Yet the institutional architecture of Indonesia’s capital markets repeatedly struggled to restrain insider lending, unhedged offshore borrowing, and collusive share-price manipulation. When the Asian Financial Crisis struck in July 1997 and the Indonesian rupiah plunged from 2,450 per US dollar to nearly 16,800 per dollar by June 1998, over 80 percent of companies listed on the Jakarta Stock Exchange became technically insolvent under mountains of unhedged dollar debt, forcing the state-created Indonesian Bank Restructuring Agency (IBRA, or BPPN) to seize vast tracts of corporate equity at a taxpayer cost exceeding 40 percent of annual GDP. Two decades later, the same structural vulnerability to thinly traded “fried stocks” (saham gorengan) erupted in the 2019–2020 collapses of state life insurer PT Asuransi Jiwasraya (16.81 trillion rupiah loss) and military pension fund PT Asabri (22.78 to 23.73 trillion rupiah loss)—the largest capital-market corruption scandals in Indonesian history. ^[2]

The 1988 Pakto 88 Deregulation and the Jakarta Stock Exchange Boom#

For a decade after President Suharto’s New Order government reactivated the Jakarta Stock Exchange in August 1977, Indonesia’s equity market existed largely on paper. Strict listing profitability requirements, heavy state bank credit subsidies, a 49 percent cap backed by bureaucratic restrictions on foreign ownership, and rigid daily price-movement limits kept private family conglomerates (konglomerat) away from the exchange. Between 1977 and early 1988, only 24 companies went public on the Jakarta bourse, and daily trading volumes frequently amounted to a handful of shares. ^[3]

The collapse of world crude oil prices in the mid-1980s forced Finance Minister Johannes Sumarlin and the “Berkeley Mafia” technocrats to liberalize Indonesia’s financial system. Under Pakto 88 (October 27, 1988) and Pakdes 88 (December 1988), the government ended the 15-year freeze on new private bank licenses, cut bank reserve requirements from 15 percent to 2 percent, equalized tax treatment between bank time deposits and equity dividends, simplified initial public offering (IPO) rules, and allowed foreign investors to purchase up to 49 percent of listed Indonesian shares. In 1992, the government transferred management of the exchange from the state capital-market agency Bapepam to a private company owned by member brokerages, PT Bursa Efek Jakarta (BEJ), and introduced the Jakarta Automated Trading System (JATS) in May 1995 alongside the landmark Capital Market Law No. 8 of 1995. ^[4]

The response was immediate and euphoric. Between 1988 and 1990, the Jakarta Composite Index surged from below 150 to over 680 in the “Jakarta Spring” boom, while the number of private commercial banks in Indonesia doubled from 111 in 1988 to over 240 by 1996. Major Suharto-era business empires—including the Salim, Sinar Mas, Lippo, Astra, Bakrie, and Gajah Tunggal groups—opened their own affiliate banks while floating minority stakes of their industrial, property, and plantation subsidiaries on the Jakarta Stock Exchange. By mid-1997, the number of listed companies on the BEJ had climbed from 24 to 282, and total market capitalization exceeded $100 billion. ^[5]

Unhedged Dollar Debt and the 1997–1998 Rupiah and Equity Crash#

Beneath the booming stock ticker, however, lay two fatal balance-sheet weaknesses. First, post-Pakto 88 private banks routinely violated statutory legal lending limits by funneling retail deposits directly into the real estate, timber, and petrochemical ventures of their controlling conglomerate owners. Second, because domestic rupiah interest rates remained high (typically 16 to 20 percent) while Bank Indonesia maintained a predictable crawling-peg depreciation of the rupiah against the US dollar of roughly 4 to 5 percent per year, listed Indonesian corporations bypassed domestic debt markets and borrowed aggressively offshore in unhedged US dollars and Japanese yen. ^[6]

By mid-1997, Indonesian private corporations had accumulated more than $65 to $80 billion in external foreign-currency debt—the majority of it short-term and virtually none of it hedged against currency depreciation, even though the borrowing firms earned their revenues almost entirely in domestic rupiah. When Thailand floated the baht on July 2, 1997, currency contagion swept across the Java Sea. On August 14, 1997, Bank Indonesia abandoned its crawling intervention band and floated the rupiah. ^[7]

What began as a currency correction rapidly spiraled into a twin banking and corporate solvency collapse. When the government closed 16 insolvent private banks (several owned by President Suharto’s relatives and associates) on November 1, 1997 without a deposit insurance framework in place, panicked depositors staged massive runs on the remaining private banks. Bank Indonesia pumped over 144 trillion rupiah in emergency liquidity support (Bantuan Likuiditas Bank Indonesia, or BLBI) into bleeding banks—much of which was immediately converted into dollars and sent abroad. ^[8]

From its pre-crisis level of 2,450 rupiah per US dollar in June 1997, the rupiah crashed past 10,000 in January 1998 and hit an all-time nadir of roughly 16,800 rupiah per dollar during the political upheaval surrounding Suharto’s resignation in May–June 1998. In domestic currency terms, the foreign debt burden of listed Indonesian companies multiplied sixfold overnight. On the Jakarta Stock Exchange, the Composite Index plunged from its July 1997 peak of 740.83 to 256.83 in September 1998; measured in US dollars, the Indonesian equity market lost more than 85 to 90 percent of its value. Over 80 percent of companies listed on the Jakarta Stock Exchange became technically bankrupt, suspending debt service and facing delisting. ^[9]

IBRA (BPPN) and the State Seizure of Corporate Indonesia#

To prevent the complete evaporation of the banking system, the Indonesian government on January 26, 1998 issued a blanket sovereign guarantee covering all commercial bank depositors and creditors and established the Indonesian Bank Restructuring Agency (IBRA, or Badan Penyehatan Perbankan Nasional / BPPN). Operating over a six-year mandate from 1998 to 2004, IBRA closed or merged dozens of failed private banks, nationalized major lenders such as Bank Central Asia (BCA) and Bank Danamon, and absorbed more than 470 to 540 trillion rupiah in non-performing loans and pledged corporate assets.

Because the controlling shareholders of collapsed conglomerate banks had breached legal lending limits and misused BLBI liquidity credits, IBRA forced Indonesia’s wealthiest tycoons to sign Master Settlement and Acquisition Agreements (MSAA), surrendering equity stakes in hundreds of operating companies—ranging from cement makers, auto assemblers, and palm oil plantations to shrimp farms and office towers—to settle their bank obligations. As economists Ross H. McLeod and George Fane documented at the Australian National University, the net fiscal cost to Indonesian taxpayers of the 1998 blanket bank guarantee and recapitalization bonds reached approximately 40 to 50 percent of Indonesia’s annual gross domestic product—one of the costliest banking bailouts in world history.

“Gorengan” Stocks and the 2019–2020 Jiwasraya and Asabri Scandals#

In the aftermath of the 1998 crisis, Indonesia merged the Jakarta and Surabaya exchanges into the Indonesia Stock Exchange (IDX) in 2007 and created an integrated financial regulator, the Financial Services Authority (Otoritas Jasa Keuangan, or OJK), in 2011. Yet a persistent structural pathology continued to plague Jakarta’s equity market: the manipulation of illiquid, thinly traded second- and third-tier stocks—known colloquially in Indonesian market slang as saham gorengan (“fried stocks”). In a classic gorengan scheme, a syndicate of corporate promoters (bandar) and nominee brokerages corners the small public float of a loss-making company, executes wash trades among dozens of controlled accounts to drive the share price up by hundreds or thousands of percent on paper, and then offloads the inflated shares into the portfolios of captive institutional funds in exchange for illicit kickbacks.

In late 2018 and 2019, this mechanism brought down PT Asuransi Jiwasraya (Persero), Indonesia’s oldest state-owned life insurance company, tracing its roots to 1859. Facing a widening balance-sheet deficit since the mid-2000s, Jiwasraya’s executives led by President Director Hendrisman Rahim, Finance Director Hary Prasetyo, and Investment Head Syahmirwan aggressively marketed a high-yield bancassurance product called the JS Saving Plan between 2012 and 2018, promising retail policyholders guaranteed tax-free annual returns of 9 to 13 percent—far above prevailing bank deposit rates.

Instead of investing the tens of trillions of rupiah raised from policyholders into liquid sovereign bonds or blue-chip equities, Jiwasraya’s directors colluded with external stock-market operators Benny Tjokrosaputro (President Director of property developer PT Hanson International Tbk) and Heru Hidayat (President Commissioner of mining firm PT Trada Alam Minera Tbk). Through direct equity purchases and 21 custom-tailored mutual funds (reksa dana) managed by 13 complicit asset-management firms, Jiwasraya poured billions of dollars of policyholder cash into artificially “fried” penny stocks controlled by Tjokrosaputro and Hidayat. When the engineered bubble burst and the underlying shares collapsed by over 90 percent, Jiwasraya defaulted on 12.4 trillion rupiah in maturing JS Saving Plan policies in late 2019. In March 2020, Indonesia’s Supreme Audit Agency (Badan Pemeriksa Keuangan, or BPK) certified that the Jiwasraya investment fraud had inflicted a total financial loss of 16.81 trillion rupiah ($1.2 billion) on the state.

Even as prosecutors tried the Jiwasraya defendants in 2020, forensic auditors uncovered an identical—and even larger—gorengan manipulation inside PT Asabri (Persero), the state-owned pension and social-insurance fund serving soldiers of the Indonesian National Armed Forces (TNI) and National Police (Polri). Between 2012 and 2019, two successive Asabri president directors (retired Major Generals Adam Rachmat Damiri and Sonny Widjaja) had handed control of the military pension fund’s equity and mutual-fund portfolios to the exact same syndicate led by Benny Tjokrosaputro and Heru Hidayat. In May 2021, the BPK announced that the Asabri stock-manipulation scheme had caused 22.78 trillion rupiah ($1.6 billion) in confirmed state losses (later updated in prosecutorial filings to 23.73 trillion rupiah)—surpassing Jiwasraya as the largest capital-market corruption scandal in Indonesian history. The Jakarta Corruption Court sentenced Hendrisman Rahim, Hary Prasetyo, Syahmirwan, Benny Tjokrosaputro, and Heru Hidayat to life imprisonment and ordered over 16 trillion rupiah in asset restitutions in the Jiwasraya case, followed by additional massive asset seizures in the Asabri verdicts, while the Indonesian government was forced to inject 22 trillion rupiah in state capital to transfer rescued Jiwasraya policies to a new state insurer, IFG Life.

Theoretical & Balance-Sheet Transmission Mechanism#

In the Kindleberger–Minsky taxonomy of financial instability (Kindleberger, 1978; Minsky, 1986) and Irving Fisher’s (1933) debt-deflation framework, speculative asset booms become systemic crises when credit expansion shifts balance sheets from hedge finance (cash flows covering principal and interest) to speculative and Ponzi finance (relying on rising asset prices and short-term margin roll-overs).

Once monetary tightening or an exogenous shock halts price appreciation, forced margin liquidations trigger Fisherian debt-deflation: fire-sale asset discounts erode bank collateral values, contracting credit supply across the real economy.

Sources and Further Reading

1. George Fane and Ross H. McLeod, “ Banking Collapse and Restructuring in Indonesia, 1997–2001,” Australian National University, Working Papers in Trade and Development No. 2001/10, 2001. Peer-Reviewed / Academic Research
2. Masaru Yoshitomi, “ The Indonesian Bank Crisis and Restructuring: Lessons and Implications for Other Developing Countries,” United Nations Conference on Trade and Development (UNCTAD), G-24 Discussion Paper Series No. 23, 2003-11. Historical & Financial Reference
3. Anwar Nasution, “ Indonesia’s 1997–1998 Economic Crisis,” in Sovereign Debt Crises: What Have We Learned?, Cambridge University Press, 2021. Peer-Reviewed / Academic Research
4. The Jakarta Post, “ BPK Conducts Investigative Audit on OJK, State-Owned Companies in Jiwasraya Case,” The Jakarta Post, 2020-06-30. Historical & Financial Reference
5. The Jakarta Post, “ Former Jiwasraya Execs Face Up to Life in Prison for Alleged Corruption,” The Jakarta Post, 2020-09-24. Historical & Financial Reference
6. Universitas Islam Indonesia Researchers, “ The Jiwasraya and Asabri Scandal: A Description Analysis & Prevention Solutions from Investment Fraud,” International Journal of Economics, Business and Management Research, Vol. 5, No. 12, 2021. Peer-Reviewed / Academic Research
7. Universitas Singaperbangsa Karawang Researchers, “ Capital Market Analysis of the Asabri Corruption Scandal: Investment Manipulation Causing State Losses of Up to IDR 23.73 Trillion,” Justices: Journal of Law, Vol. 5, No. 3, 2024. Peer-Reviewed / Academic Research
8. Irving Fisher — "The Debt-Deflation Theory of Great Depressions," Econometrica 1, no. 4 (FRASER Federal Reserve Archive, 1933): 337–357 Central Bank / Monetary Authority
9. Charles P. Kindleberger & Robert Z. Aliber — Manias, Panics, and Crashes: A History of Financial Crises (Palgrave Macmillan) Peer-Reviewed / Academic Research

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