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Jakarta Post

Fitch affirms Indonesia’s BBB rating with stable outlook, sees ‘structural weaknesses’

  • Riska Rahman

    The Jakarta Post

Jakarta   /   Mon, January 27, 2020   /   03:58 pm
Fitch affirms Indonesia’s BBB rating with stable outlook, sees ‘structural weaknesses’ Jakarta's business district (Bloomberg/File)

Credit ratings agency Fitch Ratings announced on Friday that it affirmed Indonesia’s long-term foreign and local currency issuer default rating at “BBB with a stable outlook”.

Ratings on Indonesia’s senior unsecured foreign and local currency bonds, as well as foreign currency Islamic bonds (sukuk) were also affirmed at “BBB”. The country ceiling has been affirmed at “BBB”.

The ratings agency praised a favorable medium-term growth outlook for Indonesia and a low government debt burden compared to peer countries with the same “BBB” rating that had strong dependence on external financing but also noted low state revenue and lagging structural indicators.

Fitch Ratings expects Indonesia’s gross domestic product (GDP) growth to prove resilient in the next few years at around 5.1 percent in 2020 and 5.3 percent in 2021, supported by President Joko “Jokowi” Widodo’s renewed push for public infrastructure and legal reforms during his second five-year term that started last year.  

It said the government’s structural reform efforts had the potential to lift economic growth and foreign direct investment over the medium term. However, that would depend on the implementation of a planned omnibus law expected to contain long-awaited amendments to regulations on taxation and business procedures in the country.

Despite the friendlier business environment expected from the omnibus law, Fitch warned that the rules on taxation could drive government revenue down in the short term, as the law would gradually decrease the corporate tax rate from 25 percent to 20 percent between 2021 and 2023.

“[The lower corporate tax] is likely to offset some of the revenue gains from other measures in the short run, before any potential medium-term gains materialize through higher investment,” it said in the statement.

Despite improvements in the business climate expected to be achieved through the reforms, Fitch said the Indonesian economy continued to exhibit some structural weaknesses relative to peers and was less developed on a number of metrics than many of its peers of the same “BBB” rank.