Uncertainties in Defence Sector Procurement

Indonesia has just escaped the threat of a sovereign debt downgrade after S&P Global Ratings affirmed its BBB rating with a stable outlook several days ago. Previously, markets were concerned that the rating agency would lower the government’s rating or outlook.

This was because two other agencies, Fitch Ratings and Moody’s Ratings, had downgraded Indonesia’s outlook several months earlier, although they maintained the BBB and Baa2 ratings respectively. However, S&P Global Ratings’ affirmation of the government debt rating came with three negative-side scenarios that could prompt the agency to lower the rating this year.

The three scenarios are: net government debt rising consistently at an annual pace of more than 3 per cent of GDP; government debt interest payments remaining sustainably above 15 per cent of revenue; and export receipts declining structurally, pushing gross external financing needs consistently above the level equivalent to current account receipts plus usable reserves.

S&P Global Ratings’ decision to maintain Indonesia’s sovereign rating and outlook should be welcomed, but it should not lull the country into complacency, given the three scenarios the agency has flagged. Moreover, a number of current economic indicators are not positive, as is the continuing physical hostilities between Iran and the United States and Israel.

The same applies to the government’s move to loosen fiscal discipline through several policies intended to finance programmes that suddenly emerged and must be executed immediately. Although the government has repeatedly declared its commitment to the state budget deficit ceiling of 3 per cent of GDP, such statements must still be proven by year-end.

For the defence sector, S&P Global Ratings’ affirmation is good news, since the majority of defence spending up to 2029 relies on foreign loans, denominated in both euros and US dollars.

However, the BBB rating is not a green light to create new debt recklessly, as this would not only endanger debt management but would also burden the Ministry of Defence budget between 2030 and 2050.

It should be remembered that interest and principal payments on the Ministry of Defence’s foreign loans come from the defence budget, specifically the capital expenditure line. In a more macro context, Indonesia’s debt service ratio (DSR) is far from the safe threshold set by the IMF, although the government prefers to use GDP as the measure of safe debt levels.

In May 2026, the Minister of Finance issued a Financing Source Determination (PSP) worth US$34.8 billion for the 2025-2029 period, serving as a green light for the Ministry of Defence to negotiate contracts with prospective suppliers and sign agreements. In executing the PSP, the Ministry of Finance plays the role of negotiating the loan agreements, in which matters such as tenor, interest rates, risks and others are discussed with prospective lenders.

The activation of signed contracts also takes considerable time, as it depends on the availability of matching pure rupiah funds (RMP), including if a portion of the RMP is obtained through commercial bank loans. The issuance of the PSP also gives certainty to defence sector businesses as to whether the Ministry of Defence will purchase the solutions they offer or not.

Regarding the PSP for the 2025-2029 period, there appear to be several issues creating uncertainty in Indonesian defence trade. This uncertainty stems from a number of things that could actually have been prevented had there been mature and rigid defence planning.

Precedent shows that during the 2020-2024 period, defence planning, particularly the Blue Book, was revised up to five times, when the government’s fiscal condition was better than it is now. So what are the issues that create uncertainty in defence acquisition programmes?

First, aspirations to increase the foreign loan allocation. As previously written, there are aspirations for the Ministry of Defence’s foreign loan quota to be increased by around US$10 billion to US$15 billion more so that several acquisition programmes can be executed.

This reflects that defence planning up to 2029 remains open to challenge should there be aspirations from certain parties, whether policymakers, defence manufacturers or other interested parties. This is not good from a fiscal standpoint, since the Ministry of Finance already has projections for debt management through the end of this decade, including how much fiscal capacity exists to support new foreign loans.

Second, the desire to change the PSP. Although the PSP is only two months old, there is reportedly a desire from certain parties for it to be revised so that new procurement aspirations can be accommodated. Given that the PSP is the endpoint of the Special Medium-Term Foreign Loan Plan List (DRPLN-JM) 2025-2029, changing the PSP means the Ministry of Defence must request a revision of the Special Blue Book 2025-2029.

If the desire to change the PSP is indulged by the Ministry of Defence, how then would it rationally explain to the Ministry of National Development Planning/Bappenas that the Requirements Plan has changed again within a matter of months?

A change to the PSP, which must begin with a revision of the Special DRPLN-JM 2025-2029, also creates business uncertainty for market participants, particularly foreign defence industries that have already set business projections for the Indonesian market. This creates new uncertainty for them in trading in Indonesia.

The last new uncertainty referred to is the addition of a new layer in the execution of defence equipment procurement in Indonesia, even though this new layer has no legal basis. Moreover, a number of candidate suppliers of high-quality and proven weapons systems wishing to trade in Indonesia are known to make no compromises on governance and compliance in conducting their business.

The problem of uncertainty in defence sector procurement can actually be resolved if there is a strong will from decision-makers to execute the decisions taken. Next, consistency in defence planning is needed so that there are no changes to the Blue Book, allowing the Ministry of Finance to remain prudent in debt management.

Finally, and no less important, the execution of the PSP should only be carried out by those holding the authority vested in their positions at the Ministry of Defence. No one wants today’s defence acquisition programmes to become legal problems in the coming decade, when the administration has changed through a democratic electoral process.