Financial Market Contagion Under Alternative Regional Alignments: Evidence from Indonesia’s BRICS vs. G7 Counterfactuals

Indonesia became a member of BRICS in January 2025, marking the first official entry from Southeast Asia. This study assesses whether Indonesia’s exposure to international financial contagion differs across two external financial-market configurations by comparing its spillover dynamics with BRICS markets and with a G7 advanced-market benchmark. Using daily equity index data for Indonesia, BRICS, and G7 markets, we implement counterfactual “as-if” membership scenarios and quantify return connectedness through the Diebold–Yilmaz spillover framework. We examine three major external shock episodes—the COVID-19 pandemic, the Russo–Ukrainian Conflict, and the Gaza conflict—to evaluate whether the direction and magnitude of spillovers differ across regimes. The results indicate that, relative to a G7-oriented benchmark, a BRICS-oriented scenario is associated with lower connectedness to external shocks and reduced spillover transmission to Indonesia, both during stress episodes and over longer horizons. These findings suggest that closer alignment with BRICS may contribute to short- and long-run financial stability, although sustained resilience depends on domestic financial deepening, efficiency, and diversification. Our framework offers a transferable approach for evaluating strategic regional integration decisions in the presence of global shocks.