Fitch Set to Downgrade Indonesia's Credit Outlook

Fitch Ratings, the rating agency for corporations and sovereigns, revised Indonesia’s credit outlook from stable to negative. The long‑term foreign‑currency IDR rating was left at BBB. ‘Fitch Ratings revised the outlook on Indonesia’s long‑term foreign‑currency issuer default rating (IDR) to negative from stable, and again affirmed the BBB rating,’ Fitch said in a press release received by Kompas on Wednesday, 4 March 2026.

The change in the outlook, according to Fitch, reflects rising policy uncertainty and concerns about weakening consistency and credibility of Indonesia’s policy mix, amid increasing centralisation of policy decision‑making authority. This could undermine medium‑term fiscal prospects, dampen investor sentiment, and erode external buffers.

The affirmation of the BBB rating reflects several of Indonesia’s fundamental strengths, including a track record of macroeconomic stability, relatively solid medium‑term growth prospects, a moderate government debt‑to‑GDP ratio, and adequate external buffers.

However, Fitch added, these strengths are constrained by weak government revenue, relatively high debt‑service costs, and structural indicators that lag, including governance quality relative to BBB peers.

In its announcement, Fitch also provided a number of reasons why Indonesia’s credit outlook has weakened. What are they? Below is Fitch’s explanation as set out in its press release.

1. Uncertainty over the direction of economic policy

Fitch expects the government to continue pursuing relatively cautious policies, including adherence to the 3 percent of GDP fiscal deficit limit. However, the desire to achieve an ambitious growth target of 8 percent and expanding social spending could yield a very loose fiscal and monetary policy mix, potentially risking macroeconomic and financial stability.

This risk is reflected in the government’s plan to review the State Finance Law as part of its priority legislation for 2026. If there is significant relaxation of the fiscal framework that has prevailed, including the 3 percent deficit limit, this would likely undermine policy credibility and reduce the government’s ability to fund a larger fiscal deficit without central bank support.

2. Persistent spending pressures

Fitch projects a fiscal deficit of 2.9 percent of GDP in 2026, unchanged from 2025 and higher than the government’s target of 2.7 percent.

This projection rests on more conservative revenue assumptions due to slower economic growth than the government’s forecast, and the limited near-term impact of efforts to raise tax compliance.

Efforts to boost economic growth and ease social tensions following last year’s large demonstrations are expected to raise social spending, including the Free Nutritious Meals programme projected to reach 1.3 percent of GDP. In addition, the government’s plan to accelerate spending in the first half of 2026 could heighten the risk of a widening fiscal deficit.

3. Weak government revenue

Fitch projects the total government revenue-to-GDP ratio to average 13.3 percent in 2026–2027, well below the BBB-rated country median of 25.5 percent.

Weak revenue in 2025 was driven by weak tax receipts, the near‑complete cancellation of the planned 1 percentage point VAT increase, and the permanent transfer of 0.4 percent of GDP in state‑owned enterprise dividends to Danantara.

Efforts to raise tax compliance are expected to improve receipts, but this will not yield a significant near‑term increase, keeping fiscal space constrained.

4. Danantara and off‑budget investments

Danantara, according to Fitch, was established to improve the efficiency of BUMN and support growth through commercial investments outside the APBN. Danantara plans to invest around $26 billion, or about 1.7 percent of GDP, in 2026 in downstream projects in the minerals, energy, food, and agriculture sectors.

However, there is uncertainty whether the fund’s mandate can expand into quasi‑fiscal activities through leveraged investments to support government policy priorities. If this occurs, the risks include reduced fiscal transparency, weaker policy consistency, and increased risk of contingent government liabilities.

5. Weakened governance indicators

Fitch notes that the wave of large‑scale protests in 2025 reflects public dissatisfaction. The social tensions could persist, posing political challenges for the president and the governing coalition.

In the World Bank’s Governance Indicators, Indonesia sits at the 44th percentile, below the BBB‑rated country median at the 56th percentile. Uncertainty in macroeconomic policy‑making could weigh on governance quality and the strength of the state’s institutions.

6. External vulnerability

Fitch projects the current account deficit to widen to 0.8 percent of GDP in 2026 due to weaker net exports. Foreign exchange reserves are expected to remain adequate to cover about five months of current account payments, supported by a reserve retention policy on natural resource exports.

Nonetheless, capital outflow risks remain elevated after domestic market volatility triggered by concerns about market governance. Fragile investor sentiment could add depreciation pressure on the rupiah, raise borrowing costs, and erode external buffers.

7. The Bank Indonesia mandate becoming more complex

Bank Indonesia has kept the policy rate at 4.75 percent.