Risks of Defence Spending Debt Following Negative Outlook from Rating Agencies
Moody’s downgraded Indonesia’s debt outlook from stable to negative in February 2026 due to reduced predictability and coherence in policymaking, alongside ineffective policy communication. Global rating firm Fitch Ratings followed suit in March 2026, also downgrading Indonesia’s debt outlook from stable to negative because of increased policy uncertainty and concerns about erosion of policy credibility and consistency.
The downgrade in Indonesia’s debt outlook is closely linked to several government policies placing significant pressure on the state budget (APBN), including the possibility that the fiscal deficit exceeds the intended percentage of GDP. The market now awaits whether S&P Global will similarly downgrade Indonesia’s debt outlook from stable to negative, as Moody’s and Fitch Ratings have done.
With two major rating institutions downgrading Indonesia’s debt outlook, new borrowing costs for Indonesia will increase, as lenders will consider the assessments from Moody’s and Fitch Ratings as part of their risk evaluation.
This situation is disadvantageous for Indonesia, which must continually issue new debt to finance the state budget, including funding several priority government spending programmes and covering the APBN deficit. Analysts expect Indonesia’s Debt Service Ratio (DSR) to reach approximately 45 per cent in 2026, which constitutes a warning sign regarding Indonesia’s capacity to service principal and interest payments. Many economists argue that DSR is a more appropriate measure of debt servicing capacity than the GDP ratio, as DSR reflects the ratio of debt payments to government revenue.
The downgrades by Moody’s and Fitch Ratings occurred whilst the country commenced massive spending on defence modernisation for the period 2025–2029. Whereas the government allocated USD 34.7 billion in foreign loans for defence equipment imports during 2020–2024, the provisional quota for foreign loans during 2025–2029 stands at USD 28 billion. This figure is provisional because the allocation can change at any time according to policymakers’ preferences, as careful planning in expenditure of foreign loans is now a matter of historical record.
Understanding future defence spending trends dependent on foreign loans reveals three key concerns. Firstly, weapon system acquisitions will increasingly rely on countries with low compliance standards in defence trade. This correlation between low compliance standards and equipment quality raises questions about the actual standard of military equipment Indonesia will acquire. This situation demonstrates that good governance in defence equipment procurement is not a priority, despite funds being sourced from debt.
Secondly, financing schemes present a challenge. Countries with low defence trade compliance standards typically cannot offer export credit schemes to importing nations. Since last year, Indonesia has shown a preference for commercial credit frameworks issued by private foreign lenders rather than export credit guarantee schemes. Objectively speaking, export credit guarantee schemes would be far more advantageous for Indonesia than private foreign credit, both in terms of risk and interest rates.
Thirdly, down payment policy has become flexible. Since 2025, the Indonesian government has implemented flexible policies regarding down payments in weapon system acquisition programmes financed by foreign loans, allowing the government to finance up to 100 per cent of costs if lenders agree. If a lender agrees only to finance 85 per cent of a programme, the 15 per cent down payment does not come entirely from pure rupiah domestic funds. Only 7.5 per cent comes from the state budget, whilst the remaining 7.5 per cent comprises commercial loans taken by the Indonesian government.
Based on these three factors, the risks of defence spending debt through the end of this decade—if Moody’s and Fitch Ratings maintain their negative outlook on Indonesian debt—become evident. The government’s preference for commercial debt schemes rather than export credit in defence spending means that the burden of foreign loans will inevitably increase, as all financial institutions acting as lenders will adopt the outlook issued by global rating institutions such as Moody’s and Fitch Ratings.
Should the government insist on spending USD 28 billion, the associated debt risks will be substantially greater than those from the USD 34.7 billion spent during 2020–2024, as Indonesia’s risk profile has deteriorated since 2026. Without improvements in government policy related to fiscal management, it is difficult to expect that global rating firms will upgrade Indonesia’s outlook to stable.
Additionally, the burden of defence spending debt stems from supplier countries of military equipment to Indonesia—several of which are classified by Moody’s, Fitch Ratings and S&P Global as non-investment grade. The interest rates and financing risks for importing weapon systems become expensive not only because of Indonesia’s downgraded debt outlook, but also because of the credit profiles of these supplier nations.