Fitch Ratings revises Indonesia's sovereign debt rating outlook to negative
Fitch Ratings has revised the outlook for Indonesia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to negative from stable, and affirmed the IDR at BBB, Fitch said in a report from Jakarta on Wednesday.
The revision to a negative outlook reflects rising concerns about policy uncertainty. Fitch notes that the increasing centralisation of policymaking could weigh on medium-term fiscal prospects, investor sentiment, and Indonesia’s external resilience.
However, the rating at BBB is supported by Indonesia’s track record of macroeconomic stability, reasonably solid medium-term growth prospects, a government debt-to-GDP ratio that remains comparatively moderate, and adequate foreign exchange reserves (cadangan devisa).
Several key indicators underpin Fitch’s projection.
First, the rising risk of policy uncertainty. Fitch expects the government to remain committed to keeping the fiscal deficit below 3% of GDP. However, the ambitious 8% growth target and increased social spending could incentivise looser fiscal and monetary policy.
This risk is reflected in plans to review the State Finance Law as a priority in the 2026 legislative agenda. If the fiscal framework, including the deficit cap, is relaxed, it could materially weaken policy credibility and increase reliance on central bank financing.
Second, expenditure and revenue pressures. Fitch projects Indonesia’s fiscal deficit in 2026 to be around 2.9% of GDP, slightly above the government’s 2.7% target and in line with the 2025 projection.
The projection is based on more conservative revenues as growth slows and the limited impact from efforts to improve tax compliance.
Social spending is expected to rise, including for the free nutritious meals (MBG) programme projected to reach around 1.3% of GDP.
On revenue, Fitch projects the government revenue-to-GDP ratio to average only 13.3% in 2026-2027, well below the BBB-rated median of 25.5%.
Revenue in 2025 weakens due to suboptimal tax performance, the cancellation of the VAT increase, and the transfer of state-owned enterprise dividends to the new sovereign wealth fund, Danantara.
Fourth, the risk of investments outside the central budget. Danantara has a mandate to improve the efficiency of state-owned enterprises and to spur growth through commercial investments outside the central budget. This year, the fund plans to invest around US$26 billion, or about 1.7% of GDP, in downstreaming minerals, energy, food, and agriculture projects.
Fitch notes there remains uncertainty whether Danantara’s mandate will broaden to debt-based investments to support government priorities. If so, fiscal transparency and policy consistency could be affected, increasing contingent liabilities for the country.
Fourth, Fitch also highlights a deterioration in Indonesia’s governance indicators. In World Bank governance indicators, Indonesia sits at the 44th percentile, below the BBB country median at the 56th percentile. The large protests in 2025 are described as reflecting public discontent that could pose political challenges.
Fifth, the role of Bank Indonesia (BI) and debt prospects. Fitch underlines the potential expansion of BI’s mandate to support growth and job creation, which could add complexity to keeping price stability and exchange-rate stability.
On debt, the government’s debt ratio is projected to rise slightly to 41% of GDP in 2026, still below the BBB median of 57.3%. However, interest payments, at around 17% of government revenue, are high among comparable peers.
Fitch expects Indonesia’s economic growth to remain steady at around 5% in 2026-2027. Domestic demand is expected to be the main driver, supported by public spending, Danantara investments, monetary easing, and industrial downstreaming.
Nevertheless, Fitch believes the 8% growth target for 2029 will be difficult to achieve without significant structural reforms.