Jakarta. Moody’s Ratings has kept Indonesia’s sovereign credit rating at Baa2 but revised the outlook to negative, warning that weakening policy predictability and governance risks could erode investor confidence and raise borrowing costs if left unaddressed.

The rating affirmation signals that Southeast Asia’s largest economy still benefits from resilient growth, prudent fiscal and monetary management, and structural strengths such as abundant natural resources and favorable demographics. However, Moody’s said declining clarity and coherence in policymaking over the past year have increased volatility in equity and foreign-exchange markets and raised concerns about institutional effectiveness.

The agency noted that Indonesia’s push to accelerate growth through higher social spending, including free nutritious meals  (MBG) and affordable housing, poses fiscal risks given the country’s weak revenue base. While the government continues efforts to improve tax and customs collection, Moody’s warned that expanding expenditure without durable revenue gains could widen the fiscal deficit and strain policy credibility.

Uncertainty surrounding the newly established sovereign wealth fund Danantara, which oversees state-owned enterprise assets exceeding $900 billion or roughly 60% of 2025 GDP, also contributed to the negative outlook. Questions remain over the fund’s governance, financing structure, investment priorities, and potential contingent liabilities for the state, particularly as SOE dividend policies may face pressure.

Moody’s further highlighted policy debate over the 3% fiscal deficit ceiling, possible changes to Bank Indonesia’s mandate, and evolving resource-sector regulations as signs of rising policy uncertainty that could deter foreign direct investment and heighten financial-market volatility.

“Growing public dissatisfaction over income growth, employment prospects, and living standards - reflected in protests during the past year - adds to domestic political risk.” Moody’s wrote in their report.

Despite these concerns, Indonesia’s core credit fundamentals remain intact. Moody’s expects economic growth near 5%, fiscal deficits below 3% of GDP, contained inflation, and a government debt burden that stays below the median of similarly rated peers, provided fiscal discipline is maintained.

An upgrade is considered unlikely under the negative outlook, though stability could return if policy clarity improves and revenue-raising reforms strengthen fiscal flexibility. Conversely, the rating could face downward pressure from sustained fiscal loosening without tax reform, prolonged currency weakness or capital outflows, or deterioration in SOE finances linked to Danantara’s governance.

Indonesia has recorded no sovereign default since 1983, underscoring long-standing macroeconomic stability even as Moody’s signals mounting policy-credibility risks ahead.