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Dark cloud hangs over RI economy amid declining confidence in fiscal policy
Despite maintaining the credit rating at the same high level since 2017, credit agency Fitch Ratings warned that a substantial increase in fiscal deficits could trigger a downgrade.
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Finance Minister Sri Mulyani Indrawati delivers a speech on fiscal policy on May 20, 2024, during a plenary session at the House of Representatives building in Senayan, Jakarta. In
the medium-to-long term, fiscal policy should focus on socioeconomic transformation, the green economy and defense, Sri Mulyani explained during the session. (Antara/Galih Pradipta)
F
oreign financial institutions have cautioned of rising fiscal risks following a slew of initiatives introduced by President Prabowo Subianto's administration, with some revising down their outlooks for Indonesian stocks and bonds and others warning of downgrades.
Goldman Sachs removed Indonesia’s 10- to 20-year quasi-sovereign bonds from its list of favored sectors and downgraded them to a neutral rating, citing rising fiscal risks as the main reason in a report on March 7.
The investment bank revised its fiscal deficit projection for Indonesia in 2025 to 2.9 percent of gross domestic product, a tad below the country’s legal deficit limit of 3 percent. Previously, it expected deficit to hover at 2.5 percent, aligned with the government target this year.
The revision reflects a wave of policy initiatives introduced by the administration, namely budget reallocation, the creation of a new sovereign wealth fund called Danantara, the expansion of housing programs for low-income earners and adjustments to exporter repatriation and retention rules.
“Long-end bonds will face pressure amid rising fiscal risks and a potentially heavier bond supply,” the firm stated.
Meanwhile, Fitch Ratings reaffirmed Indonesia’s long-term issuer default rating at “BBB” with a stable outlook, citing the country’s solid economic fundamentals.
The credit rating agency highlighted Indonesia’s favorable growth prospects, projecting the country’s GDP to expand at 5 percent in 2025 and 4.9 percent in the following year, well above the 3.3 percent median for countries in the same rating category.
