Fitch Ratings Affirms Indonesia's BBB- Investment Grade Credit Rating
Global credit rating agency Fitch Ratings affirmed Indonesia's sovereign credit rating at BBB- (investment grade) with a stable outlook. The country's long-term foreign and local currency issuer default rating, the senior unsecured foreign and local currency bonds, and Islamic certificates (sukuk) were all affirmed at BBB-. Meanwhile, the short-term foreign currency IDR was affirmed at 'F3', the country ceiling at BBB, and the outlook on the long-term IDRs are stable. Through the affirmation Fitch acknowledges Indonesia's ongoing commitment to structural reforms amid recent economic woes.
In a statement Fitch Ratings cited several factors that contributed to a positive assessment.
Controlled public debt: Fitch Ratings detects a moderate government debt burden and limited sovereign exposure to the country's banking system risks. The government carries a debt burden of 26.2 percent of gross domestic product (GDP) in 2015. This is an excellent figure considering that the BBB category median is 42.8 percent of GDP. However, the government's revenue collection is exceptionally low at 13.6 percent of GDP and showing a declining trend (which limits its spending power). Furthermore, the current account deficit is still wide and this contributed to recent episodes of capital outflows from Indonesia amid looming higher US interest rates and concern about China's economic slowdown.
Robust economic growth & structural reform packages: compared to peer economies as well as to the 'BBB' category median of 3.1 percent, Indonesia's economic growth at 4.7 percent (y/y) in the first three quarters of 2015 is considered strong. As such, the recent economic slowdown will not weigh on its sovereign credit profile. However, with the government's budget deficit close to the three percent of GDP ceiling, while the country's interest rate environment remains high to offset the negative impact of external factors and combat inflation, there is few room for more macroeconomic policies to boost growth.
On a positive note, recent economic stimulus packages are expected to improve the business climate of Indonesia (in the longer run), while government capital expenditures have picked up in the second half of 2015. However, Fitch Ratings remains skeptical as "measures related to reduction of red tape and the labor market have the potential to contribute to higher real GDP growth, but the impact will depend on the details of the reforms and the implementation", adding that the government's "reform agenda may signal a structural change from a more nationalistic approach to economic policy of the recent past."
The US-based credit rating agency still sees a number of weaknesses such as Indonesia's strong dependence on commodity exports, low foreign direct investment (FDI) inflows, increasing foreign debt, and large foreign ownership of government bonds. These matters make the country vulnerable to weakening investor sentiment. However, the economic context is now better than it was in mid-2013 (amid the taper tantrum). Furthermore, compared to many of its peers, the average per capita GDP is low at USD $3,402 in 2015 (compared to a BBB range median of USD $9,202). Meanwhile, Indonesia ranks low on both the United Nations Human Development Index (signalling low basic human development) and World Bank governance index.
Regarding future economic growth, Fitch Ratings expects Indonesia's annual GDP growth to rebound to 5.3 percent in 2016 and to 5.5 percent in 2017.
Resilient banking sector: Indonesia's banking system is relatively strong although the recent economic slowdown has impacted on banks' balance sheets resulting in a higher non-performing loan figure of 2.8 percent (from 1.8 percent in late 2013). Still, Indonesian banks' capital adequacy remains strong, while exposure to rupiah volatility is limited because banks have net assets in foreign currencies.
Fitch Ratings mentioned that the following two factors could negatively impact on the country's credit rating:
• A sharp and sustained external shock, for example caused by an undue change in authorities' monetary policy strategy (that currently focuses on stability). Fitch Ratings seems to hint at the country's interest rate environment. Currently, Bank Indonesia still has a relatively high BI rate (at 7.50 percent) as it prefers financial stability (amid looming higher US interest rates, high inflation and the current account deficit) over higher economic growth. However, with inflation easing sharply and also detecting a sharp improvement in the current account balance, Indonesia's central bank may be tempted to cut its interest rate.
• A rise in public debt burden, for example by breaching the 3 percent of GDP cap on the budget deficit.