Stern Warning on Indonesian Fiscal Management

Scrutiny from various global rating agencies within a short timeframe serves as a serious warning for the Prabowo administration to urgently improve fiscal management.

Within one month, Indonesia’s deteriorating fiscal management has become the primary focus of various global rating agencies. Fiscal resilience is increasingly eroded by rising government debt interest burdens, widening budget deficits at the start of the year, and intensifying external pressures.

The first warning came from Moody’s Ratings on 5 February 2026. The international rating agency downgraded Indonesia’s credit outlook from previously stable to negative whilst maintaining Indonesia’s debt rating at Baa2 level or investment-grade with moderate risk.

Moody’s assessed weakened governance and increased fiscal risks, including the 2025 state budget deficit reaching 2.9 per cent of gross domestic product (GDP), as the main factors in the downgrade of the credit outlook.

On 24 February 2026, another rating agency, Fitch Ratings, also highlighted Indonesia’s fiscal risks. Overall, Fitch still assigned a BBB rating (investment-grade with low to moderate default risk) for Indonesia’s global bonds denominated in euro and yuan.

However, like Moody’s, Fitch also highlighted Indonesia’s fiscal risks, particularly concerning increased government debt burdens and widening fiscal deficits.

Fitch also warned of risks of declining foreign exchange reserves due to capital outflows. This could be triggered by deteriorating investor confidence in Indonesia’s financial markets or large-scale foreign exchange intervention to maintain the rupiah exchange rate.

The third warning came from rating agency S&P Global Ratings on 26 February 2026. S&P warned of potential fiscal pressure if the ratio of government debt interest payments to state revenue continues to exceed critical thresholds.

S&P highlighted the debt interest payment ratio estimated to have breached 15 per cent in 2025. This figure is viewed as a sensitive level for fiscal sustainability.

If this ratio remains above 15 per cent in the medium term, S&P opens the possibility of revising the outlook to be more negative. Nevertheless, in its report, the agency maintains Indonesia’s credit rating at “BBB” level with a stable outlook.

S&P also emphasised the importance of the government maintaining credibility of its medium-term fiscal framework, particularly amid challenges in state revenue recovery and increased financing needs.

Warnings from the three rating agencies have extended cautionary sentiment in the domestic financial market, particularly the government bond and equity markets, in early 2026.

Concerns about Indonesia’s fiscal risks emerged amid budget realisation that immediately recorded a deficit in the first month of 2026. The Ministry of Finance noted that as of 31 January 2026, the budget deficit was recorded at Rp 54.6 trillion or equivalent to 0.21 per cent of GDP.

Ministry and agency spending surged 128.9 per cent year-on-year. The largest increase came from goods spending, including implementation of the free nutritious meals programme.

In nominal terms, this figure represents the deepest January deficit in the past five years, even surpassing the pandemic period. For comparison, in January 2021, when the economy was still reeling from Covid-19, the budget recorded a deficit of Rp 45.7 trillion or 0.26 per cent of GDP.

When contacted on Sunday (1 March 2026), Media Wahyudi Askar, Director of Public Policy at the Center of Economic and Law Studies (Celios), stated that amid rating agency warnings and early-year spending dynamics, markets would continue to scrutinise the government’s consistency in fiscal discipline.

Sustainability of debt management and effectiveness of state spending are key factors to maintain investor confidence and retain Indonesia’s credit rating at an investment grade level. International agency scrutiny should serve as a serious warning for the government to improve fiscal management.

So far, he assessed that the acceleration of government spending in early 2026 adds challenges to state cash flow. Spending is more concentrated on programmes with limited multiplier effects, so their impact on economic growth is suboptimal.

He projected the 2026 budget deficit could approach the upper limit permitted by law, nearly 3 per cent of GDP. This already occurred in the 2025 budget with a deficit of 2.9 per cent of GDP.

“(Deficit widening) can occur if aggressive government spending is not matched with adequate quality and productivity,” he said.

If aggressive government spending instead increases imports, pressure on the rupiah exchange rate could intensify.

On the spending side, budget realisation through the end of January 2026 reached Rp 227.3 trillion or 5.9 per cent of the total budget ceiling of Rp 3,842.7 trillion. Central government spending contributed Rp 131.9 trillion or 4.2 per cent of the ceiling. Details include ministry and agency spending of Rp 55.8 trillion and non-ministry/agency spending of Rp 76.1 trillion.

Ministry and agency spending increased 128.9 per cent year-on-year. The largest increase came from goods spending, including implementation of the free nutritious meals programme. As of 21 February 2026, spending realisation for the free meals programme reached Rp 36.6 trillion or 10.9 per cent of the budget. During the same period last year, realisation was only around Rp 45.2 billion.

Wahyudi also reminded that the quality of government spending should stimulate the domestic economy rather than increase imports. Recently, the import issue re-emerged after the government, through PT Agrinas Pangan Nusantara, imported 105,000 pickup trucks from India for the operation of the Red and White Cooperative, one of the government’s priority programmes.

He warned that if aggressive government spending instead increases imports, pressure on the rupiah exchange rate could intensify.