Sovereign rating maintained amid fiscal and debt concerns

Credit Rating and Fiscal Risks

Indonesia Maintains ‘Stable’ Sovereign Rating Amid Evolving External and Internal Challenges in 2026

As 2026 progresses, Indonesia’s sovereign credit outlook remains ‘stable’, reflecting a resilient economy actively managing a complex landscape of external shocks, domestic governance dynamics, and strategic reforms. While the nation continues to face mounting vulnerabilities—from volatile markets and external debt pressures to environmental challenges—its proactive policy responses and diplomatic diversification efforts underpin its ability to sustain investor confidence. Recent developments, however, underscore the urgency for deeper institutional reforms and adaptive strategies to preserve this stability over the long term.

External Shocks and Market Dynamics: Testing Resilience

The first half of 2026 has been marked by significant external shocks that have put Indonesia’s macroeconomic stability to the test:

Market Volatility and Rupiah Depreciation:
The Indonesia Stock Exchange (IDX) suffered its steepest decline since the 1998 Asian Financial Crisis, shedding approximately $80 billion in market value. Concurrently, the rupiah depreciated to a three-year low, pressured by rising U.S. interest rates—notably the Federal Reserve’s aggressive rate hikes—and increasing global borrowing costs. These factors have heightened fears of credit rating downgrades, which could escalate borrowing costs, deter foreign investment, and slow economic growth.
Debt Management Initiatives:
To mitigate rollover risks and ease debt servicing pressures, Indonesia has embarked on innovative debt-switching schemes, notably involving SBN (Government Securities) and Bank Indonesia’s debt management programs. As discussed in recent market reviews, these debt-switching strategies aim to optimize debt profiles and stabilize fiscal sustainability amid volatile external conditions.
Inflation and Currency Pressures:
Inflation surged ahead of Ramadan, impacting household incomes, while the rupiah’s depreciation complicated debt repayments—especially since a significant portion of Indonesia’s high external debt is linked to large infrastructure projects like the Jakarta–Bandung high-speed rail. These dynamics threaten to fuel inflation further and challenge Bank Indonesia’s efforts to contain price pressures amidst volatile capital flows.
Commodity Market Fluctuations:
Prices for nickel—a cornerstone of Indonesia’s green energy ambitions—and coal have experienced sharp swings. The Morowali landslide, which caused fatalities and temporarily halted nickel production, exemplifies operational and environmental risks in resource sectors. Meanwhile, China’s shift toward domestic coal production has dampened demand for Indonesian resources, impacting the current account balance and resource-dependent fiscal revenues.
External Demand Shifts:
Fluctuations in global demand, especially from China, add to resource sector volatility. Analysts warn that Indonesia may be approaching a ‘point of no return’ regarding resource exports and downstream, value-added initiatives that are central to its future growth strategies.

Strategic Policy Responses: Navigating Through Turbulence

In response to these external pressures, Indonesia’s government has intensified efforts across fiscal discipline, regulatory reforms, and diplomatic initiatives:

Fiscal Measures and Debt Management:
Under Finance Minister Purbaya Yudhi Sadewa, authorities have ramped up VAT inspections, tax audits, and targeted actions such as raids on Chinese-owned steel firms suspected of tax evasion. These measures aim to boost revenue amidst declining external income sources. Recent debt-management measures include debt-switching schemes involving SBN and Bank Indonesia, designed to optimize debt profiles, reduce rollover risks, and stabilize the fiscal outlook.
Institutional Reforms and Anti-Corruption Efforts:
The Financial Services Authority (OJK) has appointed new leadership to strengthen regulatory credibility amid ongoing investigations into market manipulation and corruption. Meanwhile, Indonesia’s ranking in the global corruption index fell by 10 places in 2025, highlighting institutional vulnerabilities. The KPK (Corruption Eradication Commission) faces scrutiny following recent revisions to its legal framework, sparking protests and legal debates over its independence. President Prabowo has reaffirmed anti-corruption commitments, emphasizing that "every effort to eradicate corruption will meet resistance," and underscoring the importance of institutional capacity building.
Resource-Nationalization and Downstream Development:
Indonesia has advanced resource-nationalization initiatives, exemplified by an MoU with Freeport-McMoRan to extend its mining permit beyond 2041, ensuring long-term resource control. The Daya Anagata Nusantara Investment Management Agency (Danantara) now controls the Martabe gold mine, with ambitious plans to triple asset value by 2030. Projects focusing on battery technology and nickel processing are progressing, aligning with green energy ambitions and EV supply chains. Additionally, efforts to halt tin exports aim to promote domestic downstream processing, which could boost local value but may temporarily reduce foreign exchange earnings.
Diplomatic Diversification and Security Cooperation:
Indonesia has signed an MoU with Gabon on rare earth element (REE) development, seeking to diversify its resource dependencies and strengthen green industry supply chains. The Jakarta Treaty 2026 with Australia, signed February 6, enhances regional security cooperation. The government has also secured US$38.4 billion in agreements with the United States across sectors—textiles, energy, and technology—aimed at expanding foreign direct investment (FDI) and boosting export capacity. President Prabowo and U.S. officials have announced a reciprocal trade framework, emphasizing “building a new golden age” of bilateral cooperation to offset external vulnerabilities and elevate regional influence.
Defense Modernization and Security Architecture:
The government’s defense modernization plans include acquiring aircraft carriers and upgrading island defenses. Initiatives such as converting some islands into makeshift aircraft carriers for patrol and security purposes involve substantial fiscal commitments but are deemed necessary amid regional tensions. Additionally, Indonesia is investing in cyber defense capacity building, exemplified by a recent partnership with Thales, a leading French defense company, to strengthen Indonesia’s cyber security capabilities through a joint training program with UNHAN RI (Universitas Pertahanan RI).

Governance, Rule of Law, and Social Initiatives

Recent governance developments reflect both progress and challenges:

Anti-Corruption and Legal Frameworks:
The KPK’s efforts to combat corruption face headwinds due to revisions to its legal framework, which critics argue could weaken its independence. These reforms have sparked protests and legal debates, raising concerns over rule of law and institutional integrity. Conversely, the regulatory leadership at OJK has been renewed to improve oversight, though questions remain about transparency and enforcement.
Urban and Social Resilience:
Indonesia has launched a cross-ministerial poverty alleviation strategy aimed at addressing income disparities worsened by inflation and urban crises. Recent viral videos highlight the waste management crises in Jakarta, which threaten urban livability, prompting urgent calls for sustainable urban waste solutions and climate adaptation measures. Strengthening social resilience remains a priority to prevent social unrest amid economic uncertainties.

Environmental and Urban Resilience Challenges

Despite economic resilience, environmental issues continue to pose significant risks:

Jakarta’s Waste and Flood Crisis:
The capital city grapples with overflowing landfills and recurrent flooding, prompting government commitments to urban resilience investments. Recent policies aim to revise waste management, but large-scale projects are still in development, raising questions about effectiveness and timeliness.
Deforestation and Climate-Related Disasters:
Illegal logging and deforestation have intensified flooding and environmental degradation, leading to fatalities and habitat loss. The government has revoked permits and sanctioned illegal logging firms, signaling a tougher stance on environmental governance. These measures are crucial to mitigate future disasters and align with climate commitments.
Operational and Environmental Risks in Resource Sectors:
The Morowali landslide underscores operational vulnerabilities in resource hubs, emphasizing the importance of climate resilience and environmental safeguards in resource-dependent regions.

Digital Governance and Fiscal Prudence

Indonesia’s digital infrastructure remains fragmented, with approximately 27,000 government applications operating independently. Recognizing the inefficiencies, authorities are prioritizing digital reform initiatives to streamline service delivery and enhance transparency—a move that is critical for building investor confidence.

On the monetary side, Bank Indonesia maintains steady interest rates to balance currency stability with economic growth. Simultaneously, urban infrastructure spending and climate resilience investments continue to exert fiscal pressures, requiring careful management to sustain the ‘stable’ rating.

Current Status and Future Outlook

Indonesia’s ‘stable’ sovereign rating in 2026 underscores its resilience amid external shocks and internal reforms. The nation’s strategic diplomatic engagements—highlighted by US agreements totaling US$38.4 billion, initiatives like Jakarta Treaty 2026, and resource partnerships with Gabon—position it favorably for future stability.

However, ongoing challenges—such as urban environmental crises, governance vulnerabilities, and resource sector risks—necessitate continued fiscal discipline, effective debt management (including debt-switching schemes), and strengthening institutional integrity. The recent cyber defense partnership with Thales exemplifies Indonesia’s commitment to building a resilient security framework, while urban resilience investments are crucial to address pressing environmental crises.

In summary, Indonesia’s outlook remains cautiously optimistic. Its ability to sustain a ‘stable’ rating hinges on continued reforms, diplomatic diversification, and sustainable resource policies—all vital to fostering resilient, inclusive growth in an increasingly complex regional and global landscape.

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