The Impact of Financial Market Turmoil on Indonesia's Defence Spending
Since late February 2026, Indonesia’s securities market has experienced persistent turbulence, with consistent declines despite occasional upward phases. The root cause of stock market volatility lies in sharp criticism from a global financial market participant regarding the management of Indonesia’s financial markets by the authorities.
The Indonesian rupiah has depreciated approximately six percent against the US dollar from January to the last week of May 2026. The rupiah’s decline stems from market distrust in government fiscal policies, despite Bank Indonesia’s USD 10 billion forex interventions from December 2025 to April 2026.
Indonesia’s financial market turmoil appears set to persist, especially with S&P Global expected to release its government debt outlook and rating in July 2026. S&P Global recently criticised Indonesia’s natural resource export controls, stating this creates uncertainty around its sovereign rating.
It remains uncertain whether Fitch Ratings and Moody’s will maintain Indonesia’s debt outlook and ratings in the coming months. Negative assessments could directly impact global financial institutions’ credit policies towards Indonesia.
Fiscal and monetary challenges will inevitably affect the government’s planned defence spending, including equipment acquisitions this year. Funding for these acquisitions relies on Foreign Loans (PLN), though in recent years, the Ministry of Defence has increasingly used pure rupiah (RM) for importing foreign weaponry.
Following the National Development Planning Agency’s release of the 2025-2029 Blue Book, 2026 Green Book, and Defence Ministry’s Special Activity List, the Finance Minister is expected to announce the funding sources before year-end.
Recent fiscal and monetary developments point to two key factors affecting defence spending: credit rating risks and rupiah depreciation.
A downgrade in Indonesia’s sovereign rating this second half is unlikely to be ignored, given recent government policy shifts attracting global rating agencies’ scrutiny. Current sovereign ratings stand at BBB from S&P and Fitch, and Baa2 from Moody’s.
If one or more agencies downgrade Indonesia’s debt rating in H2 2026, it would directly impact current defence spending plans. A downgrade from BBB to BBB- or even BB+ by S&P/Fitch, or from Baa2 to Baa3 or Ba1 by Moody’s, would have significant implications.
For context, nations with BB or Ba ratings—non-investment grade—are among the Defence Ministry’s key arms suppliers, such as Turkey.
Direct consequences include higher borrowing costs, especially if downgraded from investment to non-investment grade. Lenders may impose risk premiums on defence procurement financing, increasing total costs.
With the Defence Ministry’s ambitious US$34.8 billion defence procurement plan through 2029, does Indonesia still have fiscal space to support this? Rating agencies have noted excessive spending without fiscal discipline, while government revenues face pressure, leading to higher budget deficits relative to GDP.
Secondly, rupiah depreciation against major currencies affects defence spending, which typically relies on US dollars and euros. Since 2025, the Defence Ministry has started using pure rupiah for major weapon purchases from Russia, as no lenders were willing to finance such deals. These funds come from BA BUN allocations, with Rp150.5 trillion earmarked for defence spending in fiscal year 2026. As the rupiah continues to weaken against the US dollar, will the Defence Ministry proceed with planned purchases from Russia and Belarus?