Indonesia outlook revised to stable from positive - S&P | Outlook data
(Insider Stories) – Ratings agency Standard & Poor’s Ratings Services has revised its outlook for Indonesia to stable from positive while affirming its sovereign credit ratings, as stalled reform momentum and a weaker external profile have diminished the potential for a rating upgrade by the agency in the next 12 months despite a favorable debt profile due to cautious fiscal management and modest government debt and interest burdens.
“We may raise the ratings if reforms, such as a subsidy rationalization, suggest that fiscal and external vulnerabilities are sustainably reduced, the sovereign’s balance sheet improves, the external debt burden declines, or if structural reforms unlock faster economic growth,” S&P says in a statement.
“Conversely, we may lower the ratings if renewed fiscal or external pressures are not met with timely and adequate policy responses, or if future policies endanger strong growth prospects or the positive fiscal and debt trajectories.”
The full text of the statement follows:
Indonesia Outlook Revised To Stable From Positive; Ratings Affirmed At ‘BB+/B’ And ‘axBBB+/axA-2′
SINGAPORE (Standard & Poor’s) May 2, 2013—Standard & Poor’s Ratings Services today revised its outlook on the Republic of Indonesia to stable from positive.
At the same time, we affirmed our ‘BB+’ long-term and ‘B’ short-term sovereign credit ratings and ‘axBBB+/axA-2′ ASEAN regional scale rating on Indonesia.
Standard & Poor’s transfer and convertibility risk assessment on Indonesia is unchanged at ‘BBB-’. We also affirmed our ‘BB+’ rating on Indonesia’s outstanding senior unsecured notes.
The outlook revision to stable reflects our assessment that the stalling of reform momentum and a weaker external profile have diminished the potential for a rating upgrade over the next 12 months. The sovereign credit rating on Indonesia reflects the economy’s low per capita income, still-developing structural and institutional foundations, a weak policy environment, and a high and rising external leverage.
These rating constraints are weighed against the country’s well-entrenched cautious fiscal management and resultant modest general government debt and interest burden, which make for a favorable debt profile.
Indonesia’s per capita GDP at a projected US$3,800 (2013) is relatively low in the rating category. This is despite a decade of moderately strong growth during which real per capita GDP rose at an average of 4.7% per year.
“We believe that at this income level Indonesia has a limited ability, relative to wealthier peers, to ensure policy flexibility,” said Standard & Poor’s credit analyst Agost Benard. “The government also has less room to maneuver when maintaining creditworthiness would require unpopular polices.”
Slow progress in improving critical infrastructure, along with legal and regulatory uncertainties and bureaucratic obstacles, detract from Indonesia’s growth potential, thus delaying poverty reduction and economic development.
Political considerations related to next year’s parliamentary and presidential elections appear to increasingly shape policy formulation. This weakening policy environment may ultimately have a negative impact on growth prospects and the generally sound economic conditions.
Indonesia’s external credit fundamentals have also weakened somewhat in light of rising private sector external leverage and a structural current account deficit, which foreign direct investment inflows do not fully offset. Unlike Indonesia’s general government, which has reduced external leverage through prudent fiscal and debt policies, the private sector’s external borrowing has doubled over the past six years to 2012, now roughly equaling the outstanding government external debt stock of about 50% of current account receipts.
“This growth in private sector external borrowing has been mostly propelled by the prevailing low interest rates in foreign currency debt,” Mr. Benard noted. “But it also reflects the shallowness of the domestic bond market, where outstanding debt securities amount to just 13.2% of GDP.”
However, government fiscal and debt profiles remain key underlying credit strengths, and we expect those to improve further. Standard & Poor’s forecasts net general government debt to decline to 22% of GDP in 2013, which is a relatively light burden compared with similarly rated peers. The attendant interest burden of about 7% of general government revenue poses a moderate constraint on discretionary spending.
The stable outlook reflects our view that the weakened policy environment and external pressures are fairly balanced against the country’s strong growth prospects, conservative fiscal policy, and debt trajectories.
We may raise the ratings if reforms, such as a subsidy rationalization, suggest that fiscal and external vulnerabilities are sustainably reduced, the sovereign’s balance sheet improves, the external debt burden declines, or if structural reforms unlock faster economic growth.
Conversely, we may lower the ratings if renewed fiscal or external pressures are not met with timely and adequate policy responses, or if future policies endanger strong growth prospects or the positive fiscal and debt trajectories.
