Indonesia stands at a critical juncture as major credit rating agencies reaffirm its investment-grade sovereign ratings, while casting a cautious eye on the government’s fiscal policies and revenue challenges. With ratings holding steady at levels maintained since before the pandemic, agencies such as Moody’s, Fitch Ratings, and S&P Global Ratings have highlighted the archipelago’s robust economic growth and low debt burden as key strengths. Yet, they warn that the balance between ambitious political promises and fiscal discipline under President Prabowo Subianto’s administration could determine whether an upgrade—or a downgrade—looms on the horizon.
The stakes are high. An upgraded rating could unlock greater foreign investment and lower borrowing costs, propelling Indonesia toward its ambitious target of 8% GDP growth by 2029. Conversely, a downgrade, triggered by widened fiscal deficits or weakened revenue streams, could erode market confidence and hinder economic progress. As the government navigates this delicate terrain, questions remain about how it will reconcile campaign pledges with the need for prudent financial management.
Stable Ratings Amid Economic Strengths
On Thursday, Moody’s Ratings reaffirmed Indonesia’s sovereign debt rating at “Baa2” with a stable outlook, a position unchanged since April 2018. The agency pointed to strong domestic consumption and stable commodity exports as key drivers of economic growth, projected to remain around 5% for 2025 and 2026. Finance Minister Sri Mulyani Indrawati welcomed the assessment, stating in a press release on Wednesday: “Moody’s affirmation reflects the government’s hard work in maintaining economic and fiscal stability. We remain committed to strengthening Indonesia’s economic foundation and ensuring inclusive, sustainable growth”. 
Similarly, Fitch Ratings upheld Indonesia’s “BBB” rating with a stable outlook on 11 March, a level consistent since September 2017. The agency underscored the country’s promising medium-term growth prospects and a government debt-to-GDP ratio of 40.4% in 2025—well below the 58% average for BBB-rated peers. S&P Global Ratings echoed this optimism in July 2024, maintaining its “BBB” rating since May 2019, citing disciplined fiscal policies and a budget deficit kept below 3% of GDP as supportive factors.
These affirmations reflect Indonesia’s resilience in a volatile global economy. The country’s relatively low debt burden offers a buffer against external shocks, while steady growth signals its potential as a regional economic powerhouse. However, the path to an upgrade hinges on addressing persistent structural challenges, particularly in revenue generation.
Revenue Challenges and Fiscal Risks
Despite the positive outlook, credit rating agencies have flagged Indonesia’s weak government revenue intake as a significant barrier to an upgrade. Fitch Ratings projects the government’s revenue-to-GDP ratio at 14.3% for 2025 and 2026, notably lower than the 21.2% median for peer countries. Structural issues, including declining commodity prices and policy decisions such as the redirection of state-owned enterprise dividends to the newly established sovereign wealth fund, Danantara Indonesia, have compounded these challenges. Additionally, the government’s decision to backtrack on a planned VAT hike has further constrained revenue streams.
George Xu, Fitch Ratings’ director of sovereigns for Asia-Pacific, highlighted the potential consequences of fiscal slippage in a statement to The Jakarta Post on Wednesday: “A scenario of substantially wider fiscal deficits and a material increase in the government’s debt burden could weaken market confidence and negatively impact Indonesia’s credit profile”. This warning underscores the delicate balance the government must strike as it pursues economic expansion.
Suhindarto, head of the economic research division at domestic credit rating agency Pefindo, echoed these concerns in an interview with The Jakarta Post on Friday. He cautioned that a fiscal deficit exceeding 3% of GDP could prompt a downgrade, adding: “S&P Global Ratings has even indicated that, if the government’s general interest payments consistently exceed 15 percent of revenue, it may consider lowering Indonesia’s credit rating”. Such a downgrade would not only increase borrowing costs but also deter foreign investors, many of whom adhere to strict credit rating thresholds for portfolio allocations.
Political Promises vs. Fiscal Discipline
President Prabowo Subianto, who assumed office with a mandate to deliver on bold campaign promises, faces a complex dilemma. Flagship initiatives such as the free nutritious meal programme, designed to address malnutrition and boost public welfare, risk straining the state budget if not matched by corresponding revenue growth. Moody’s explicitly noted this tension, warning of the potential conflict between political commitments and fiscal prudence, as reported by Kompas.
Syafruddin Karimi, a lecturer at Andalas University, elaborated on the risks associated with such programmes. He suggested that without robust revenue backing, these initiatives could undermine market confidence and jeopardise Indonesia’s credit standing. The government’s ability to fund these programmes sustainably will be a litmus test of its commitment to balancing populist policies with economic stability.
Moreover, external factors add to the uncertainty. Moody’s identified potential tariff increases from key trade partners like the United States as a risk to Indonesia’s export-driven growth. A narrower export base and a relatively shallow financial sector further temper the country’s strengths, as noted by S&P Global Ratings. If global trade conditions deteriorate, the government may be tempted to adopt a more expansionary fiscal stance, a move that could exacerbate deficit concerns.
Path to an Upgrade: Opportunities and Obstacles
An upgrade in Indonesia’s sovereign credit rating could yield significant economic benefits. As Suhindarto explained, a higher rating would attract greater foreign investment by meeting the minimum thresholds of many international financial institutions. This influx of capital could create jobs, improve welfare, and support infrastructure projects critical to achieving the government’s 8% GDP growth target by 2029. Additionally, reduced borrowing costs through a lower risk premium on government debt would free up resources for public spending.
However, securing an upgrade requires addressing long-standing weaknesses. Moody’s suggested that strengthening state revenue, deepening financial markets, and enhancing the competitiveness of manufacturing and commodity sectors could pave the way for a higher rating. These reforms, while necessary, demand political will and long-term commitment—qualities that may be tested amid competing domestic priorities.
Indonesia’s low GDP per capita and limited fiscal revenue streams remain structural hurdles. While the government has set ambitious growth targets, translating these aspirations into tangible outcomes will require navigating both domestic and international challenges. The redirection of state-owned enterprise dividends to Danantara Indonesia, for instance, reflects an innovative approach to funding development, but its impact on revenue collection remains uncertain.
Looking Ahead: A Test of Resolve
As Indonesia charts its economic course under President Prabowo Subianto’s leadership, the interplay between fiscal discipline and political ambition will shape its credit profile. The affirmations from Moody’s, Fitch, and S&P Global Ratings offer a vote of confidence in the country’s current trajectory, but they come with clear caveats. Strengthening revenue streams and maintaining fiscal restraint will be paramount to unlocking the benefits of an upgraded rating, while avoiding the pitfalls of a downgrade.
For now, the government’s commitment to sustainable growth appears resolute, as evidenced by Finance Minister Sri Mulyani’s emphasis on economic stability. Yet, with flagship programmes and global uncertainties on the horizon, the road ahead is fraught with challenges. How Indonesia balances these competing demands will not only determine its standing in the eyes of credit rating agencies but also its ability to cement its position as a leading economy in South East Asia. As policymakers grapple with these issues, investors and citizens alike watch closely, hopeful for a future of prosperity and stability.
