Moody’s outlook downshift sends negative signals despite resilience

Indonesia’s economy grew 5.11 percent in 2025, slightly higher than 5.03 percent in 2024, but still below the government’s 5.2 percent target. Though the figure signaled resilience, it was quickly overshadowed by Moody’s decision to revise its outlook for Indonesia from stable to negative, citing governance concerns and policy uncertainty. The revision has renewed questions about the ambition of President Prabowo Subianto ’s administration to reach 8 percent amid the country’s longer-term goal of becoming an advanced economy.

Last year’s outcome nonetheless exceeded projections by the World Bank and the International Monetary Fund, both of which had forecast growth of just 4.8 percent in October. Their caution was understandable: first-quarter growth came in at 4.87 percent despite a seasonal boost during Ramadan and Idul Fitri 2025. Momentum strengthened in subsequent quarters, however, with the fourth quarter emerging as a clear turning point.

Financial markets responded positively following the Finance Ministry’s Rp 200 trillion (US$12 billion) capital injection into state-owned banks, and the Indonesia Stock Exchange (IDX) Composite index reached an all-time high of 9,134.7 in January 2026.

Capital flows also reversed course. After three straight quarters of net outflows, which peaked at Rp 110 trillion in the third quarter, Indonesia recorded a net inflow of Rp 31.2 trillion. The rebound was driven largely by Bank Indonesia Rupiah Securities (SRBI) and equities, which rose by Rp 27.4 trillion and Rp 12.4 trillion, respectively.

Fourth-quarter growth accelerated to 5.39 percent, supported primarily by 6.12 percent growth in investment, the strongest expenditure component. Exports of goods and services grew 7.03 percent buoyed by manufacturing, which accounts for 19.2 percent of gross domestic product and contributed 1.07 percentage points to overall growth. The expansion was led by basic metals, which grew 15.71 percent on strong demand for iron, steel and precious metals. The World Bank upgraded its projection to reflect these improvements with a 5 percent growth forecast for Indonesia in 2026 and 2027.

However, manufacturing faced headwinds from global trade tensions earlier in 2025: The purchasing managers’ index (PMI) remained in contraction territory over the five months from March to July before rebounding in August. By January 2026, the PMI had climbed to 52.6, signaling renewed business confidence, with the recovery driven mainly by resilient domestic demand amid uncertain global demand.

Consumer sentiment followed a similar trajectory. The central bank’s consumer confidence index (IKK) fell to 115 in September 2025, its lowest level since the COVID-19 pandemic, before it rebounded last month to 127.7, comparable to levels seen in early 2025.

While households appear more optimistic, the recovery has been uneven: Confidence has risen more strongly among higher-income households (earning above Rp 5 million per month) than among lower- and middle-income groups, suggesting that the rebound is not yet broadly shared.

Structural challenges also persist. As of last November, 7.35 million people were unemployed to result an unemployment rate of 4.74 percent, a high figure compared to several Southeast Asian peers. Vietnam, for example, recorded 8 percent growth in 2025 with 2.2 percent unemployment, underscoring Indonesia’s competitiveness gap in the region.

Revenue mobilization remains a key vulnerability. Tax revenue reached only 87.6 percent of the 2025 target to result in a tax ratio of 9.31 percent, far below the government’s stated goal of 12 percent. Tax buoyancy fell to minus 0.62, meaning that tax revenue declined 0.62 percent per 1 percent of economic growth.

At the same time, public spending expanded, particularly for Prabowo’s flagship initiatives including the free nutritious meal, the “3 million homes” and the Red and White Rural Cooperatives programs. To accommodate these priority programs, the allocation for regional transfers was cut 23 percent from Rp 849 trillion in 2025 to Rp 650 trillion in 2026. This final figure was later increased to Rp 693 trillion, but it still remains the lowest allocation since 2016.

More critically, Moody’s reaffirmed Indonesia’s Baa2 rating but revised the outlook to negative, citing concerns over reduced predictability in policymaking, governance quality and institutional credibility under the Prabowo administration. Despite retaining investment-grade rating, the revised outlook signals rising fiscal and institutional risks.