Why Fitch Revises Indonesia’s Debt Outlook to Negative

Jakarta, CNBC Indonesia — Fitch Ratings, the international credit rating agency, has announced the revision of the outlook for Indonesia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to negative from the previously stable level.

Meanwhile, Indonesia’s debt rating itself, according to the latest assessment as of March 2026, remains BBB, i.e., investment grade.

‘This revision reflects rising policy uncertainty and eroding consistency and credibility of Indonesia’s policy mix amid increasing centralisation of policy-making powers. This could weaken medium-term fiscal prospects, damage investor sentiment, and put pressure on external reserves,’ the official statement said, on Wednesday (4 March 2026).

In Fitch’s assessment, the driver behind the latest debt rating assessment is the administration of President Prabowo Subianto, which aims to achieve an ambitious growth target of 8% and higher social spending. They view that focus as potentially leading to a looser mix of fiscal and monetary policy, thereby creating risks to macroeconomic and financial stability.

The rising risks are seen in Fitch’s description of the government’s and Parliament’s draft revision of the State Finance Law within the 2026 Priority Prolegnas. Through that revision, Fitch considers there is a possibility that the deficit limit could be relaxed from the 3% of GDP that has been maintained.

‘This could undermine policy credibility and the ability to finance a higher fiscal deficit without support from the central bank,’ Fitch said in its assessment.

This situation is further aggravated by the potential for higher social expenditure, including a free nutritious meals programme (totalling 1.3% of GDP for 2025-2029).

‘The plan to accelerate spending in the first half of 2026 could add to fiscal slippage risks,’ Fitch said.

On the revenue side, they expect it to remain weak at an average of 13.3% of GDP over 2026-2027. This is mainly due to tax revenue remaining soft and essentially scrapping plans to raise the VAT rate.

There is also the permanent transfer of state-owned enterprise dividends (0.4% of GDP) to the Danantara Investment Management Agency, and tax refunds that may be temporary. Danantara is also seen as introducing uncertainty in attracting investment domestically.

‘Continued efforts to strengthen tax compliance should raise revenue, but are unlikely to yield material increases in the near term, thereby limiting fiscal space,’ Fitch said.

Fitch also notes that the August-September 2025 demonstrations are part of governance indicators that are weaker.

‘The broad protests in 2025 highlight public discontent and there is a risk that social tensions could persist, posing political challenges for the president and governing coalition,’ Fitch said.

Indonesia’s governance position in the World Bank’s indicators is considered to have deteriorated, at the 44th percentile on the composite governance score, below the BBB median at the 56th percentile.

‘The persistent uncertainty around macroeconomic policy formulation can further burden governance and the state’s institutional strength,’ Fitch added.

Fitch also considers that the current account deficit will widen to 0.8% of GDP in 2026 due to weaker net exports, as investor sentiment remains fragile, creating risks of further depreciation pressure that could raise borrowing costs and erode external reserves.

The new mandate for Bank Indonesia to spur growth and job creation is also under the latest Fitch spotlight. Especially because it ‘could hamper BI’s ability to meet its core goals of controlling inflation and maintaining exchange-rate and financial stability if pressures on capital outflows increase.’

Fitch also contemplates a slight rise in overall government debt to around 41% of GDP in 2026, below the BBB rating’s median projection of 57.3%.

‘We expect the debt ratio to remain broadly stable in the medium term, reflecting our baseline assumption that the government will adhere to the fiscal deficit limit. Nevertheless, interest payments are projected to be 17% of government revenue in 2025, the highest in the BBB category,’ Fitch said.

Despite the negative sentiment, Fitch emphasised that there are a number of other indicators that reinforce Indonesia’s BBB rating position. One is stable growth around 5.0% in 2026-2027, twice the BBB rating country median of 2.5%.

The driver is domestic demand remaining the main growth engine, supported by higher public expenditure, including the Danantara investment, monetary easing, moderate debottlenecking reforms, and downstream activity in targeted industries, offsetting the drag from weaker net exports.

‘The government’s 8% growth target by 2029 will be difficult to achieve without substantial structural reforms,’ Fitch said.