The credibility of Indonesia's financial sector is being tested. This began with MSCI's warning, which triggered the January Shock. This was followed by revisions to Indonesia's debt rating outlooks by Moody's and Fitch Ratings to negative, although Indonesia still maintains investment grade status with a BBB (Fitch) or Baa2 (Moody's) rating.
The rating agency highlighted policy uncertainty and the potential for policy easing to pursue 8% economic growth. The revised outlook should not be viewed as merely negative sentiment for investors in financial markets, but rather as something that could have broad implications for society.
Outlook revisions should be viewed as an early warning of fiscal shock. A negative outlook represents a potential rating downgrade within the next one to two years if fiscal governance is not improved. Finance Minister Purbaya Yudhi Sadewa frequently reassures the public by asserting that fiscal indicators are under control and that the deficit will remain below 3% of GDP.
The problem is, the rating agency's focus goes beyond current fiscal indicators. It also highlights weakening governance and declining predictability of policy direction, which risk undermining investor confidence.
Ironically, while rating agencies have consistently praised fiscal discipline and prioritized prudent aspects, they are now assessing problems with fiscal governance.
Impact of Rating Downgrade on Fiscal
Rating opinions directly influence the state budget (APBN) through market mechanisms. This is because the APBN relies on the market through the issuance of Government Securities (SBN) to cover the deficit.
According to data from the Ministry of Finance's Directorate General of Financing and Risk Management (DJPPR), as of January 2026, government debt, as measured by outstanding government securities (SBN), had reached approximately IDR 8.500 trillion. This figure represents a significant increase over the past five years, growing 112% from IDR 4.015 trillion at the end of 2019.
Every year, the government needs to issue new government securities (SBN) to finance the deficit and refinance maturing government securities (SBN). Based on the author's analysis of DJPPR data, the accumulated maturing value of rupiah-denominated SBN is estimated to reach approximately Rp2.500 trillion by 2029. Consequently, at least Rp2.500 trillion in new SBN is needed for refinancing alone.
SBN issuance in the market is generally conducted through a weekly auction mechanism. Developments in market sentiment will directly impact the increase in the state budget interest burden, as investors will demand higher yields during the auction.
Market volatility, including a downgrade in the rating outlook, has also dampened investor interest in acquiring government securities (SBN). Data from the Directorate General of Public Offerings (DJPPR) auctions shows a decline in incoming bids, from Rp90,96 trillion in the inaugural Government Securities (SUN) auction in January to Rp50,94 trillion in the SUN auction on March 3, 2026.
A rating downgrade, if it occurs, could have systemic consequences. The state budget would experience a premium shock in the government securities (SBN) market. Financial markets risk outflows, which would trigger exchange rate depreciation and narrow the central bank's scope to lower its benchmark interest rate.
Higher SBN yields further narrow fiscal space. In the 2026 State Budget, debt interest is estimated to reach Rp 599,44 trillion, accounting for approximately 19% of total central government spending.
Moreover, with the war in the Middle East, pressure on the state budget is increasing. Finance Minister Purbaya has even simulated the impact of an oil price increase of US$92 per barrel, which would increase the fiscal deficit to 3,6%-3,7%.
Lessons from Brazil
Brazil is an example of where a negative outlook served as an early warning of fiscal shock. S&P revised Brazil's debt outlook to negative in 2013 due to deteriorating fiscal fundamentals, weak economic growth, and declining policy credibility.
At that time, Brazil's overall fiscal deficit had reached approximately 3,3% of GDP. The worsening fiscal situation and political crisis then prompted further downgrades: S&P downgraded Brazil from investment grade to speculative grade in September 2015. Fitch followed suit in December 2015 and Moody's in February 2016.
Since 2015, the Brazilian government has implemented fiscal austerity measures through spending cuts and revenue increases. Under President Michel Temer, Congress then passed constitutional amendment EC-95, which capped federal spending growth at the inflation rate for 20 years. This policy was widely criticized for risking squeezing social spending, particularly on health and education, and sparked widespread protests.
Brazil's situation reflects deficit bias, as seen in public choice theory. This condition is the result of a political process that encourages the government to run persistent deficits throughout every economic cycle. This is done to maintain public support without considering the future fiscal impact.
Although Brazil's macroeconomic conditions at that time were different from those in Indonesia today, the deficit factor could be a risk factor that could lead to austerity in the future.
Impact of Rating Downgrade on Social Protection
If Indonesia is not careful and continues to widen the deficit, market pressures could force the government to resort to austerity measures, similar to Brazil's. Budget tightening always leaves social protection spending vulnerable.
UNICEF, in its Prospects for Children report, warned developing countries that debt servicing now costs 11 times more than social protection budgets. Since 2021, more than 130 countries have initiated fiscal consolidation, with social protection programs being the primary target of cuts, both due to debt burdens and IMF aid conditionality.
Fiscal Credibility Must Be a Priority
The government needs to take concrete steps to respond to the downgrade in its rating outlook, including enforcing its commitment to fiscal discipline, particularly by maintaining the deficit below 3% and ensuring the independence of financial regulators such as Bank Indonesia and the Financial Services Authority (OJK).
On the expenditure side, the government needs to implement priority programs that consume large budgets, such as the Free Nutritious Meals (MBG), in a gradual, measured manner, and address inefficiencies. The war in the Middle East, which has driven up oil prices, should rationalize adjustments to the MBG program. The government also needs to reallocate spending to productive sectors with a multiplier effect.
From the revenue side, the government can optimize progressive tax schemes such as wealth taxes that target the super-rich (crazy rich). PRAKARSA estimates the potential additional cash from this tax to be up to IDR 155 trillion. Furthermore, the government needs to implement efforts to close the under-invoicing gap, as previously emphasized by Deputy Finance Minister Juda Agung.
This negative outlook revision should serve as a wake-up call for the government to immediately enforce governance discipline to avoid fiscal shocks that could potentially directly impact the wider community in the future.
Editor: Aria W. Yudhistira
This article has appeared on Katadata.co.id
Author: Roby Rushandie
Editor: Aria W. Yudhistira