Beyond Market Turmoil, Indonesia Hit by Another Fresh Blow!

(Jakarta, Feb 6) According to international media reports, credit rating agency Moody’s on Thursday (Feb 5, local time) downgraded Indonesia’s sovereign outlook to “negative” from “stable”, citing concerns over policy stability and governance under President Prabowo Subianto. However, Moody’s maintained Indonesia’s sovereign credit rating at the investment-grade level of “Baa2”.

The move underscores heightened market scrutiny over fiscal discipline and decision-making transparency in Southeast Asia’s largest economy. In its statement, Moody’s said the outlook revision reflects declining policy predictability, which could weaken policy effectiveness and signal a deterioration in governance.

Since taking office, Prabowo has introduced a series of wide-ranging reforms, including expanding social spending programmes, establishing a new sovereign wealth fund, Danantara, replacing a market-respected finance minister, and appointing close allies to the central bank’s board. These moves have raised concerns about widening fiscal deficits and potential risks to monetary policy independence. Moody’s warned that if such trends persist, they could erode Indonesia’s long-standing policy credibility and undermine macroeconomic and financial stability.

Market turmoil and capital outflows

The downgrade follows a turbulent week for Indonesia’s capital markets. MSCI had warned about transparency issues in Indonesia’s equity market, raising the risk of a downgrade to “frontier market” status, which triggered foreign capital outflows.

The Jakarta Composite Index plunged as much as 5% in a single session, triggering circuit breakers and wiping out more than US$80 billion (about RM316.4 billion) in market value. The stock exchange’s chief executive subsequently resigned in late January. Moody’s said Indonesia could face further rating pressure if fiscal expansion continues without accompanying revenue reforms, or if capital outflows worsen its external position.

In response, Indonesia’s finance ministry said it was “grateful” that Moody’s maintained the country’s investment-grade rating, stressing that the government is pursuing economic transformation to revive growth while keeping fiscal risks under control. Coordinating Minister for Economic Affairs Airlangga Hartarto said international rating agencies may not yet fully understand Indonesia’s reform measures, adding that President Prabowo has ordered strict action against any violations of stock market rules. Analysts expect Indonesian assets to remain under heavy selling pressure in the near term unless the government delivers more convincing transparency reforms.