Fitch Ratings-Hong Kong-20 December 2017: Fitch Ratings has upgraded Indonesia’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to ‘BBB’, from ‘BBB-‘. The Outlook is Stable.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
The upgrade of Indonesia’s IDRs reflects the following key rating drivers:-
Indonesia’s resilience to external shocks has steadily strengthened in the past few years, as macroeconomic policies have consistently been geared towards maintaining stability. A more flexible exchange-rate policy since mid-2013 has helped foreign reserve buffers swell to USD126 billion as at November 2017, reaching seven months of current account payments, compared with the ‘BBB’ median of six months. Moreover, monetary policy has been sufficiently disciplined to limit bouts of volatile capital outflows during challenging periods. Macro-prudential measures have helped curb a sharp rise in corporate external debt, while financial deepening has coincided with improved market stability. The focus on macro stability is also evident in credible budget assumptions in the previous few years.
Indonesia’s resilience has improved, but external challenges remain, including potential emerging market pressure in the context of the US Federal Reserve’s policy normalisation. Indonesia’s dependence on commodities remains relatively high and both its net and gross external debt (166% of current account receipts; ‘BBB’ median: 130%) remain elevated compared with ‘BBB’ peers. Domestically, the possibility that political noise becomes a distraction from economic policy-making in the run up to the 2018 local elections and 2019 presidential election represents a risk to the strong reform drive and could undermine domestic and foreign market sentiment, although such an outcome is not Fitch’s base case.
The government’s concerted structural reform drive is improving a still-challenging business environment. Implementation of measures to reduce business procedural and permit requirements have sharply improved Indonesia’s position in the World Bank’s Ease of Doing Business ranking to 72nd out of 190 countries; a rise of 37 places in two years. The reforms also seem to be contributing to stronger external finances, with foreign direct investment (FDI) picking up in recent quarters to such an extent that Fitch expects net FDI to cover the current account deficit over the next few years.