The downgrade of Indonesia’s credit outlook by Moody’s Investors Service, along with similar concerns raised by Standard & Poor’s Global Ratings, has sparked discussion about the direction of the national economy.
The issue extends to raising concerns among the public and investors. Although Indonesia retains its investment-grade status, the change signals weakening policy governance, rising fiscal risks, and the potential erosion of investor confidence in the country’s economic direction.
UGM economist, Dr. Eddy Junarsin, stated that the downgrade of Indonesia’s credit outlook by global rating agencies serves as an early warning signal of increasing perceptions of future economic risk, but does not yet indicate a national economic crisis.
Although Indonesia’s credit rating remains at investment grade, the outlook revision reflects investor perceptions of future policy governance and institutional capacity.
“The downgrade of the credit outlook should be read as an early warning signal, meaning it is not automatically a verdict of crisis. The outlook reflects the potential direction of policy and institutional capacity over the next 12 – 24 months, so what is being tested is not only the current economic condition but also the credibility of state policy in the eyes of the global market,” he explained on Tuesday (Feb. 24).
He added that the downgrade does not indicate a fundamental threat to the national economy, but rather signals reputational and risk perception concerns in the global market.
Several macroeconomic indicators still show relatively robust conditions, including projected economic growth of 5.11% in 2025, January 2026 inflation at a moderate 3.55%, the current policy rate at an acceptable 4.75%, a 2025 budget deficit-to-GDP ratio of 2.92% still below the theoretical 3% threshold and a manageable 2025 debt-to-GDP ratio of 40.46%, well under the 60% theoretical limit.
According to Dr. Junarsin, the primary challenge lies in maintaining future policy credibility, as market participants assess fiscal consistency, policy transparency, and clarity of economic direction as key determinants of investor confidence.
“I see the situation as not yet fundamentally alarming. What must be safeguarded is future policy credibility. This is serious as a reputational and risk perception signal, but it is not yet a structural threat to the national economy,” he said.
Under the sovereign rating methodology used by Moody’s Investors Service, assessments are based not only on current economic conditions but also on policy credibility, governance consistency, and the predictability of government fiscal decisions. Global investors, he noted, are highly sensitive to the clarity of policy direction, including the financing of state spending, fiscal discipline, and transparency in government communication.
External factors such as geopolitical uncertainty, global interest rates, and financial market volatility also influence investor perceptions of emerging economies, but the strength of domestic institutions and policies remains the primary determinant of market response and investor confidence.
“Therefore, institutional strength and domestic policy credibility are the main determinants, while external factors amplify the pressure,” he remarked.
In the short term, changes in the credit outlook may have a greater impact on domestic financial market sentiment than on economic fundamentals. Initial market reactions are generally psychological and expectation-based, potentially exerting pressure on the exchange rate, increasing stock market volatility, and raising sovereign borrowing costs.
Currency pressure may occur as investors reduce exposure to riskier assets through portfolio rebalancing, lowering demand for domestic assets and potentially leading to depreciation.
“However, such depreciation is usually limited if external fundamentals such as foreign exchange reserves and the balance of payments remain stable,” he added.
In the stock market, the outlook revision may trigger profit-taking by foreign investors and heighten volatility. Meanwhile, the most sensitive impact is typically seen in the government bond market, where a downgraded outlook can increase the risk premium and push up sovereign bond yields, making government financing more expensive and potentially narrowing fiscal space.
Nevertheless, Dr. Junarsin emphasized that the magnitude of the impact largely depends on the policy response. If policy communication remains credible and fiscal discipline is maintained, market turbulence is likely to be temporary and does not necessarily reflect a drastic weakening of economic fundamentals.
Experiences from other emerging markets show that stability returns quickly when investors see a clear commitment to fiscal discipline and macroeconomic stability.
“In the short term, we may see pressure on the exchange rate, stock market volatility, and rising bond yields. But this reflects reactions to risk signals, not necessarily a drastic deterioration of economic fundamentals,” he said.
To address the outlook revision, Dr. Junarsin stressed that the most urgent step is restoring policy credibility. Trust is a decisive macroeconomic variable, as rating agency assessments test not only fiscal figures but also confidence in the government’s future policy direction. The government must strengthen its medium-term fiscal framework by ensuring that any expansion in spending has clear and sustainable financing sources.
Fiscal discipline must be demonstrated as a consistent structural commitment rather than a short-term response. In addition, the quality of public spending should be improved to enhance productivity and long-term economic growth, particularly through investment in infrastructure and human capital.
“What is most urgent is not merely new policies, but the restoration of policy credibility. When rating agencies change the outlook, what is being tested is not only fiscal numbers, but confidence in future policy direction,” he stated.
Furthermore, he highlighted the importance of consistent and transparent policy communication to maintain market trust. Fiscal and monetary policy coordination must be clearly communicated and minimize surprises so that market participants have certainty in making economic decisions.
At the same time, the government must strengthen structural reforms, including enhancing competitiveness, simplifying regulations, and improving bureaucratic efficiency to improve perceptions of institutional risk.
“The essence is not to react to the market, but to build credibility. If the government can demonstrate fiscal discipline, effective spending, and consistent governance, investor confidence will gradually recover. Markets fundamentally value certainty, and certainty stems from policies that are measurable, transparent, and economically accountable,” Dr. Junarsin concluded.
Writer: Cyntia Noviana
Editor: Gusti Grehenson
Post-editor: Jasmine Ferdian
Photo: Freepik