International credit rating agency Fitch Ratings has affirmed Indonesia’s sovereign credit rating of “BBB-” (investment grade) with a stable outlook despite its recent economic woes. It also expects the annual real gross domestic product (GDP) of the Southeast Asian nation to pick up to 5.3% in 2016 and 5.5% in 2017 from 4.8% in 2015.
The rating service had given the country an “investment grade” rating at the BBB level in December 2011, noting its steady economic growth, stable macroeconomic indicators, and lower public debt.
In its latest assessment issued earlier this month, Fitch cited the factors that contributed to the positive rating, including controlled government debt and limited sovereign exposure to banking system risks.
It said the slowdown in real GDP growth to 4.7% in each of the past three quarters does not materially weigh on the sovereign credit profile in itself, as this is still well above the ‘BBB’ category median of 3.1%.
“The recent wave of reform initiatives by the government is likely to improve business sentiment. The series of announced packages include a number of measures with the potential in the longer run to significantly change the business environment, which can currently be characterised as difficult.
“For instance, measures related to reduction of red tape and the labour 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.”
Moreover, it said the external balances of Indonesia, while still weak, look more favorable now than in mid-2013, when the taper tantrum struck, and significantly better than in the run-up to the Asian financial crisis of 1997-98.
“Foreign exchange reserves are still comfortable at 5.6 months of current external payments, but have fallen by USD14bn to USD101.7bn in the seven months up to September 2015, in part due to the authorities’ interventions to reduce volatility in the exchange rate,” it continued.
Indonesia’s relatively strong banking system was also a positive consideration, “although the slowing business cycle has put pressure on many corporate and bank balance sheets,” Fitch said.
“However, the banking sector’s capital adequacy is strong and banks’ exposure to rupiah depreciation is limited as many banks reportedly have net assets in foreign currency, lowering the chances that the government would have to extend support.”
Meanwhile, Fitch identifies the main factors that could trigger negative rating action, including a sharp and sustained external shock to foreign or domestic investors’ confidence and a rise in the public debt burden.
On the other hand a positive rating action could be triggered by a strengthening of the external balances, which would make Indonesia less vulnerable to sudden changes in foreign-investor sentiment, and evidence that structural reforms or improvements in infrastructure translate into higher sustainable GDP growth in the longer run.
Photo: Gunawan Kartapranata
