Fitch Affirms Indonesia at 'BBB-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Indonesia's Long-Term Foreign- and Local Currency Issuer Default Ratings (IDRs) at 'BBB-'. The issue ratings on Indonesia's senior unsecured foreign- and local-currency bonds are also affirmed at 'BBB-'. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at 'BBB' and the Short-Term Foreign-Currency IDR at 'F3'.
KEY RATING DRIVERS
Indonesia's ratings balance a low government debt burden, favourable growth outlook and limited sovereign exposure to banking-sector risks with a weak external position that makes the country relatively vulnerable to shifts in market sentiment and an improving (but still weak) business environment.
Solid GDP growth compared with peers supports Indonesia's credit profile, with average growth of 5.6% over the past 10 years. Fitch expects real GDP growth of 5.1% in 2016, 5.5% in 2017 and 5.7% in 2018, supported by a stepped-up structural-reform effort and a pick-up in public capital expenditure that is starting to have an impact on growth. Both contributed to a positive turn in market sentiment, in addition to more general emerging-market optimism, and is illustrated by a relatively stable rupiah in recent months, which is about 10% stronger than the September 2015 historical low.
The government's strong structural reform drive since September 2015 is likely to significantly improve the weak business environment. Indonesia still ranks 109th out of 189 countries in the World Bank's Ease of Doing Business ranking, one of the lowest among peers in the 'BBB' category. This is expected to improve as the government specifically targets a reduction in the number of government clearances needed to do business and the time involved. Reforms such as a more standardised approach to minimum wage setting also strengthen the business climate, while changes to the Negative Investment List suggest a more welcoming attitude to foreign investors. The reform impact on investment and real GDP growth will depend on the implementation and to what extent the government continues to create a welcoming climate for investors.
Indonesia's headline inflation is now more in line with peers after falling back within the formal target range of 3% to 5% in November 2015 after the base-effect of an administrative fuel price-hike ended. A drop in inflation to 3.6% in April 2016 from 6.8% a year earlier, and a narrowed 2015 current-account deficit of 2.1% from 3.1% in 2014, allowed Bank Indonesia to cut its benchmark rate by 75bp so far this year and lower the reserve-requirement ratio by 100bp, deserting the tight policy stance it pursued during most of 2015 to weather market turmoil.
Foreign reserves rose to USD107.7bn in April 2016, equal to 6.5 months of current-account payments and higher than the 'BBB'-median of 5.6 months. However, Indonesia remains relatively vulnerable to shifts in market sentiment and is largely dependent on commodities for its exports and portfolio inflows to finance its persistent current-account deficit, which Fitch expects to widen to 2.6% in 2016 and 2.7% of GDP in 2017, from 2.1% in 2015. The external environment remains uncertain, with the Fed expected to re-start hiking its policy rate and other risks, including a severe slowdown in China.
The low general-government debt burden of 26.8% of GDP, which Fitch does not expect to rise significantly as Indonesia is adhering to a budget-deficit ceiling of 3% of GDP, compares well with the 'BBB'-median of 42.2% and helped Indonesia in times of market turbulence. Fitch expects a fiscal deficit of 2.7% in 2016, not far-off the 'BBB'-median of 2.6%. However, fiscal space to boost public capital expenditure is limited due to very low government revenue, which at 13% of GDP is lower in only four of the 113 sovereigns Fitch rates. A higher intake resulting from a government-announced tax amnesty could create some fiscal space, but the impact on revenue is uncertain.
Fitch considers sovereign exposure to banking-sector risks as limited. Private credit represents only 39% of GDP and the banking system's health is relatively strong, although slowed GDP-growth is pressuring corporate and bank balance-sheets. This is deferring private-sector capital expenditure and has increased non-performing loans to 2.8% of total assets in March 2016, from a low of 1.8% at end-2013. However, the banking sector's capital adequacy is strong.
The Indonesian economy is less developed on a number of metrics than its peers. Its ranking on the United Nations Human Development Index falls in the "medium development" category and indicates relatively weak human development compared with 'BBB' category peers, while average-per-capita GDP remains low at USD3,368 in 2015, compared with the 'BBB'-median of USD9,253. Governance also continues to be weak, as illustrated by a low, although gradually improving, 44th percentile score for the World Bank governance indicator. This compares with a 'BBB'-median of 52nd percentile.
The main factors that, individually or collectively, could trigger positive rating action are:
- A strengthening of the external balances, making Indonesia less vulnerable to sudden changes in foreign-investor sentiment, for instance through lower commodity export dependence or structurally higher foreign direct investment inflows.
- Evidence of higher sustainable GDP growth in the longer run, for instance resulting from structural reforms or infrastructure improvements.
The main factors that, individually or collectively, could trigger negative rating action are:
- A sharp and sustained external shock to foreign and/or domestic investors' confidence with the potential to cause external financing difficulties.
- A rise in the public debt burden, for example caused by breaching the budget-deficit ceiling.
- The global economy performs broadly in line with Fitch's Global Economic Outlook.