Uncertainties in Defence Sector Procurement

Indonesia recently avoided a sovereign debt downgrade when S&P Global Ratings affirmed its BBB rating with a stable outlook. However, the agency outlined three negative scenarios that could trigger a downgrade this year: a sustained annual increase in net government debt exceeding 3 percent of GDP, interest payments consistently above 15 percent of revenue, and a structural decline in export earnings driving gross external financing needs beyond current account receipts and usable reserves. While the maintained rating is positive for the defence sector, which relies heavily on foreign loans for procurement through 2029, it should not encourage reckless new borrowing. Such a path would endanger debt management and burden the defence budget between 2030 and 2050, as both interest and principal payments for foreign loans are drawn from the capital expenditure allocation. Indonesia’s debt service ratio has already exceeded the IMF’s safe threshold, even though the government prefers to measure debt safety against GDP. In May 2026, the Finance Minister issued a financing source determination worth US$34.8 billion for the 2025-2029 period, authorising the Ministry of Defence to negotiate and sign contracts. Yet, contract activation often faces delays due to the availability of companion rupiah funds, including those sourced from commercial bank loans. The current procurement plan introduces several uncertainties. First, there is an aspiration to increase the foreign loan quota by US$10-15 billion to accommodate additional acquisition programmes, undermining the integrity of the existing fiscal plan. Second, there is a desire to revise the financing source determination just two months after its issuance, which would require amending the medium-term foreign loan plan and the defence blueprint. Such revisions would create business uncertainty for market players, particularly the defence industry.