Fitch Ratings indicated that Indonesia could temporarily exceed its legal fiscal deficit ceiling of 3% of GDP without an immediate downgrade. This flexibility applies if the breach is a temporary response to economic disruptions stemming from the Middle East conflict.
George Xu, sovereign ratings director at Fitch, stated that clear communication from Indonesian policymakers regarding a committed fiscal consolidation path would prevent an imminent downgrade. Fitch previously revised Indonesia's credit rating outlook to negative from stable last month, citing increased uncertainty and weakened policymaking credibility.
The war in the Middle East has exacerbated fiscal risks, contributing to rising subsidy costs due to the government's commitment to not raise fuel prices. Policymakers are considering a wider deficit, potentially reaching 4% of GDP, though the baseline scenario for the 2026 fiscal gap is estimated at 2.9%.
Fitch's assessment suggests a hypothetical one-year waiver of the deficit ceiling would not trigger an immediate downgrade. However, sustained higher deficits over the long term could deteriorate credit fundamentals and lead to a negative rating action.
Xu also highlighted concerns about potential substantial relaxation of fiscal and monetary policies if the government aims to achieve President Prabowo Subianto's ambitious 8% growth target, especially with limited structural reforms. Fitch is also monitoring how the government might use entities like the new sovereign wealth fund, Danantara, for public spending. Additionally, expanding the central bank's mandate to support economic growth could complicate its primary role of stabilizing the rupiah.