JAKARTA, April 23 - Indonesia has some leeway to temporarily exceed its statutory fiscal deficit limit of 3% of gross domestic product without triggering an immediate credit rating downgrade, a senior Fitch Ratings official said on Thursday. The caveat is that any breach must be a short-term response to economic shocks stemming from the war in the Middle East and must be accompanied by a clearly communicated plan to return to consolidation.
Fitch cut Indonesia's credit rating outlook to negative from stable last month, citing rising uncertainty and a perceived weakening in policymaking credibility. That move did not factor in the subsequent fiscal complications tied to the Iran war, which have increased the strain on the budget after the government pledged not to raise fuel prices - a choice that has increased subsidy expenditures.
"If they communicate with the market very clearly with a very committed fiscal consolidation path going forward, I don’t think that will trigger an imminent downgrade," said George Xu, sovereign ratings director at Fitch, speaking on the sidelines of the agency’s annual Indonesia conference in Jakarta.
Policymakers have explored scenarios in which the deficit widens because of the conflict, including talk of a shortfall around 4% of GDP. The baseline estimate for the 2026 fiscal gap stands at 2.9% of GDP, which remains under the 3% legal cap but is wider than a prior projection of 2.7%.
Officials have publicly insisted they will not breach the 3% ceiling, mindful of potential investor reactions. Nevertheless, Xu said a hypothetical one-year waiver of the legal limit would not automatically lead to a downgrade in Fitch's view.
That tolerance comes with strict limits. Xu warned that if authorities allow a permanently higher deficit, credit fundamentals would deteriorate and a negative rating action would become likely. "If the government basically uses (the war) as an opportunity to pursue a much higher deficit for a longer term, we will basically reassess the debt ratios trajectory ... and that will lead to a negative rating action," he said.
Xu also pointed to the broader policy risks that prompted Fitch's earlier outlook downgrade. With limited structural reforms visible, there is a danger that fiscal and monetary policies could be materially loosened to pursue President Prabowo Subianto's ambitious 8% growth target, which Fitch views as a source of risk to credibility and macro stability.
Fitch will be watching closely for potential methods the government might use to circumvent the deficit rule, including deploying the new sovereign wealth fund Danantara to carry out public spending off the official balance sheet. On the monetary side, the expansion of the central bank’s mandate to actively support growth could distract it from stabilising the currency, Xu said.
That concern was underscored by currency moves, with the rupiah sliding to a record low of 17,320 to the dollar on Thursday. Under consideration in parliament is a bill that would broaden Bank Indonesia's remit to include promoting growth in the real economy and fostering job creation - a change Xu said could complicate policy implementation and raise the odds of mistakes. "That just complicates their policy mandates and increases the risk of policy missteps," he said.
Fitch's stance, as articulated by Xu, therefore draws a clear distinction between a one-off, time-limited fiscal response to an external shock and a sustained abandonment of fiscal discipline. The former can be absorbed without an immediate ratings reaction if authorities present a credible return path; the latter would force a reassessment of debt trajectories and could trigger negative rating action.
($1 = 17,300 rupiah)