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Fitch affirms Indonesia’s BBB rating with stable outlook despite vulnerabilities
Fitch cited a favorable medium-term growth outlook and low government debt-to-GDP ratio against high dependence on external financing among the reasons for retaining the rating, but also noted issues around low state revenue and lagging structural indicators.
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Fitch expects Indonesia’s economy to shrink 2 percent this year due to the impacts of the coronavirus pandemic, which has made a significant dent in household spending and investment. (Antara/Nova Wahyudi)
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redit ratings agency Fitch Ratings has affirmed Indonesia’s long-term foreign currency issuer default rating at “BBB with a stable outlook”, the lower medium investment grade.
Fitch cited a favorable medium-term growth outlook and low government debt-to-GDP ratio against high dependence on external financing among the reasons for retaining the rating, but also noted issues around low state revenue and lagging structural indicators.
Fitch expects Indonesia’s economy to shrink 2 percent this year due to the impacts of the coronavirus pandemic, which has made a significant dent in household spending and investment. However, it forecast a rebound to 6.6 percent growth next year thanks to low-base effects and 5.5 percent growth in 2022 supported by a renewed push for public infrastructure development.
“Our forecasts are subject to considerable risks, in particular due to a continued spread of COVID-19 within Indonesia,” the rating agency said in a statement. “The government has responded swiftly to the crisis with a broad range of relief measures to support households and companies, including small and medium-sized enterprises.”
The government has allocated Rp 695.2 trillion (US$47.5 billion) to stimulate the economy, which shrank 5.32 percent in the second quarter as household spending and investment tumbled. The government has also widened the budget deficit target to 6.34 percent of GDP.
“We believe the government is likely to resume adhering to the 3 percent-of-GDP deficit ceiling by 2023” Fitch said, expecting Indonesia’s fiscal deficit to narrow to 5 percent in 2021 and 3.5 percent in 2022 as most of the pandemic-related spending was seen as temporary.
The government and Bank Indonesia’s (BI) $40 billion debt monetization scheme is expected to reduce the government's direct interest costs and “is unlikely to generate inflationary pressures”, according to the rating agency.
However, if the central bank financing goes beyond 2020 it may raise the potential for government interference in monetary policymaking and that could undermine investor confidence, Fitch warned.
“This may be mitigated by Indonesia's generally disciplined monetary policy stance of the past few years, which reinforces our belief this will be a one-off [policy].”
Fitch warned that Indonesia's dependence on foreign portfolio financing and commodity exports left it vulnerable to renewed bouts of external risk aversion and other shocks.
“The government remains open to any stimulus to boost the economy, but we will also remain accountable. They considered this to be prudent policymaking,” said Finance Minister Sri Mulyani Indrawati responding to Fitch's announcement, adding that the burden-sharing scheme with the central bank was being executed based on prudent monetary and fiscal practices.
“We have succeeded in giving credit rating agencies confidence that the government has a carefully designed policy framework” to support the economy, she went on to say.
