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No ratings upgrade, no progress?
President Joko “Jokowi” Widodo’s “work, work, work” administration may not be working hard enough to deserve a much-awaited ratings upgrade from Standard & Poor’s (S&P).
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Made in Indonesia: President Joko 'Jokowi' Widodo and First Lady Iriana Widodo ( left ) visit a handicraft stand at the Jakarta Convention Center in Jakarta during the 2015 Jakarta International Handicraft Trade Fair ( Inacraft ) on April 8. (JP/Wendra Ajistyatama)
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resident Joko “Jokowi” Widodo’s “work, work, work” administration may not be working hard enough to deserve a much-awaited ratings upgrade from Standard & Poor’s (S&P).
On Wednesday, S&P, the only “Big Three” international ratings agency not to rate Indonesia at investment grade level, announced it had maintained the country’s sovereign credit level just one notch below, at BB+ with a positive outlook, against widespread expectations of an upgrade.
Its statement gave credit to the government’s structural reforms, including redirecting costly energy subsidies into productive infrastructure spending as well as cutting red tape for investment, but they were not enough for a ratings upgrade with many improvements still needing to be made.
“Fiscal performance has not improved in tandem for cyclical and structural reasons,” S&P said in the statement, which repeatedly mentioned that more works needed to be done to improve fiscal performance — the responsibility of the Finance Ministry.
Jokowi’s administration, with its aptly named Working Cabinet, based on the President’s desire for his ministers to work to improve livelihoods in Southeast Asia’s largest economy, has set an ambitious state revenue target as it seeks to boost Indonesia’s historically low tax payments to fund massive infrastructure projects which, in theory, would get the economy moving.
The reality, however, is not so sweet. The government failed to meet its tax collection target last year by a wide margin, achieving only 81.5 percent of the Rp 1.29 quadrillion target. As a result, the state budget deficit rose to 2.5 percent of the country’s gross domestic product (GDP) in 2015, nearing the 3 percent that is, legally allowed.
The fiscal deficit is expected to worsen this year to 2.7 percent of GDP, according to S&P. Better revenue performance should also come from improved tax compliance and higher non-oil revenues through higher excise taxes on tobacco and luxury goods. Indonesia’s tax to GDP ratio was at 12 percent recently, lower than neighboring peers Vietnam, Singapore, the Philippines, Malaysia and Thailand.
“We could raise our ratings on the government this year or next if the improvement in institutional settings, particularly its fiscal framework, delivers better quality spending, deficits on a declining trend, moderate government debt and limited contingent fiscal liabilities,” S&P wrote, adding that the full and timely execution of fuel subsidy reform would be a step in the right direction.
Before the ratings decision, S&P executives visited Indonesia and met with Jokowi as well as a number of high-ranking officials, at which time the President expressed hope of an upgrade and called on his ministers to work all-out in making sure the upgrade was secured.
Finance Minister Bambang Brodjonegoro, who is responsible for a lot of the points raised by S&P, looked at the glass half full, saying the result was a little below expectations, but was good enough considering other emerging economies, some of which suffered downgrades.
Still, he could not help feeling disappointed. “[I’m] a little disappointed because its reasons seemed made up,” he told The Jakarta Post after the ratings announcement. “[S&P] argues that our deficit and loans increased, whereas our debt to GDP ratio is way below that in developed countries.”
Indonesia’s total loans to GDP ratio reached 26.8 percent in 2015 and the government expects to see it rise only slightly to 27 percent this year, the latest data from the Finance Ministry showed, lower than in Malaysia, India, Germany and the US.
Analysts said the impact of no ratings upgrade from S&P would not be huge, but was a setback for the country’s economy that is working to attract investments to stoke growth, which slowed to the weakest level in six years at 4.79 percent in 2015.
CReco economist and founder of the Danareksa Research Institute, Raden Pardede, acknowledged that Indonesia had not made solid and significant progress in managing the whole economy, even though it has issued 12 reform packages.
“The government budget is in bad shape with uncertainty in revenues, including the tax amnesty, hence it transformed into uncertainty in development spending,” said Raden.
Bahana Securities head of corporate strategy and research Harry Su said it would affect the government’s plan to lure back billions of dollars stashed overseas by Indonesians in a tax amnesty program for which a bill is currently being deliberated at the House of Representatives, with a target to pass it into law this month.
“I think no upgrade from S&P effectively means a no-confidence vote on the government’s tax amnesty program,” Harry said.
The central bank said it had taken all S&P suggestions on board, although it had its own opinion about improvements Indonesia has made in managing the economy.
“We respect the decision, even though we believe we gave thorough information regarding all five aspects: governance, economy, external, fiscal and monetary. We will continue to strengthen macroeconomic indicators,” Bank Indonesia Governor Agus Martowardojo said.
