March 24, 2025
JAKARTA – Major credit rating agencies have maintained Indonesia’s sovereign rating at the same investment grade since before the pandemic but are watching policy decisions carefully to decide whether any future change would be upward or downward.
A significant increase in government revenue could pave the way for upgraded ratings, enabling the country to attract more foreign investment and reduce borrowing costs, but a downgrade could be on the horizon should the government allow the state budget deficit to widen by prioritizing political commitments over prudent financial management, the agencies say.
On Thursday, Moody’s Ratings reaffirmed Indonesia’s sovereign debt rating at “Baa2” with a stable outlook, a level it has kept in place for the archipelago since April 2018.
The credit rating agency cited strong domestic consumption and stable commodity exports as key drivers of economic growth, which is projected to hover around 5 percent this year and next. However, potential tariff increases from trade partners like the US could pose a risk to the outlook.
Moody’s indicated that an upgrade could be on the horizon should Indonesia be able to strengthen state revenue, deepen its financial markets or enhance the scale and competitiveness of its manufacturing and commodity sectors.
“[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,” Finance Minister Sri Mulyani Indrawati said in a statement on Wednesday.
Despite the affirming assessment, Moody’s warned that President Prabowo Subianto could face a dilemma between delivering on election promises and maintaining fiscal discipline, as quoted by Kompas.
Syafruddin Karimi, a lecturer at Andalas University, noted that flagship programs like the free nutritious meal program could strain the state budget and erode market confidence if not supported by sufficient revenue growth.
Fitch Ratings, which has maintained Indonesia’s “BBB” rating with a stable outlook since September 2017 and affirmed it on March 11, attributes the country’s credit stability to its strong medium-term economic growth prospects and low government debt-to-gross domestic product (GDP) ratio.
These factors have shielded Indonesia from a downgrade, according to Fitch, but a weak government revenue intake continues to hold back an upgrade.
The agency highlighted that Indonesia’s general government debt-to-GDP ratio at 40.4 percent this year was well below the projected 58 percent average for BBB-rated countries.
However, concerns linger over the country’s fiscal trajectory. Should economic growth fail to accelerate as expected, the government may shift toward a more expansionary fiscal policy.
“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,” George Xu, Fitch Ratings’ director of sovereigns for Asia-Pacific, told The Jakarta Post on Wednesday.
Fitch Ratings projected Indonesia’s government revenue-to-GDP ratio at 14.3 percent for both this year and next, below the 21.2 percent median of its peer countries.
Xu noted that this outlook factored in declining commodity prices and structural challenges in boosting revenue, particularly after the government backtracked on a planned VAT hike and redirected dividends of state-owned enterprises (SOEs) to the newly established sovereign wealth fund, Danantara Indonesia.
In July last year, S&P Global Ratings reaffirmed Indonesia’s “BBB” long-term credit rating with a stable outlook, maintaining the position it has held since May 2019.
The agency cited Indonesia’s solid growth prospects, disciplined fiscal policies by keeping budget deficits below 3 percent of GDP over the next three years and a relatively low government debt burden as key factors supporting the investment-grade rating.
However, these strengths are tempered by challenges, such as low GDP per capita, a narrow export base, limited fiscal revenue streams and a financial sector that remains relatively shallow and less diversified.
Suhindarto, head of the economic research division at domestic credit rating agency Pefindo, emphasized that improving state revenue was the key to securing an upgrade in Indonesia’s sovereign credit rating.
Conversely, he warned that a decline in state revenue, which may lead to a fiscal deficit exceeding 3 percent of GDP, could prompt credit rating agencies to issue a downgrade.
“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,” Suhindarto told the Post on Friday.
He outlined several benefits of a rating upgrade, including increased foreign investment, as many financial institutions have minimum credit rating thresholds for their portfolios. That, in turn, would support economic growth by boosting employment and improving people’s welfare, he suggested.
Additionally, a higher rating would lower the government’s borrowing costs by reducing the risk premium on its debt and increasing the pool of potential lenders.
“We cannot rely solely on domestic capital to fund government projects […], as its availability is limited. We need foreign investment to accelerate economic growth, especially since the government has set a pretty ambitious target of 8 percent GDP growth by 2029,” he concluded.