Fitch Ratings expects signs of recovery in business activity in Indonesia in second half (2H) of 2020 following some easing of social distancing measures since end June - Photo by AC Ventures

JAKARTA (TheInsiderStories) – Fitch Ratings expects signs of recovery in business activity in Indonesia in second half (2H) of 2020 following some easing of social distancing measures since end June. However, the pace of recovery will be slow as companies are not permitted to operate at full capacity, while a decline in many households’ income will lead to consumers being cautious with their spending.

Other risks to the recovery are the re-enacted social distancing measures, as imposed by the Jakarta provincial government on Sept. 14, 2020. The contraction in the domestic and global economy, coupled with softer commodity prices, has caused weakening credit profiles, pressured liquidity, and resulted in higher refinancing risks for Indonesian corporates.

Moreover, Fitch also thinks that companies with weak credit profiles may face challenging funding access to support operations – where cash flow has been under pressure during the pandemic – as well as to refinance maturing debt. The agency has taken 32 downgrade actions on Indonesian issuers’ national and international Ratings throughout 2020 to end-August.

Homebuilders and contractors have accounted for most of the downgrade action due to slower project construction, which disrupts cash collection and leads to liquidity pressure. Meanwhile, the weak commodity prices have also caused downgrades to our crude palm oil and mining-related issuers. Yet the performance of telcos and tower companies has been resilient, driven by rising data traffic and manageable exposure to foreign-currency exposure.

Earlier, Moody’s Investors Service says that the coronavirus-triggered global recession will continue to pressure Asia Pacific non-financial companies, with negative credit trends to persist through the rest of 2020. Its expect the recovery from this recession to be prolonged, although the easing of lockdown measures should support a gradual recovery in the second semester.

“The ability of businesses to recover will depend on the pace at which consumer demand rebounds, which in turn hinges on governments’ ability to restore confidence by reducing fear of contagion,” says Clara Lau, a Moody’s analyst in a written statement on July.

Fiscal and monetary stimulus programs in both advanced and emerging markets have helped stabilize financial markets and provided temporary relief to companies. However, the operating performance and financing capability of companies are vulnerable to financial market shocks, particularly if a second wave of infections results in renewed lockdowns.

The rating trend in second quarter (2Q) of 2020 remained negative across Moody’s Asia Pacific rated corporate portfolio, although the number of negative rating actions has decreased. The agency took 86 negative actions in 2Q, down from 120 in 1Q.

Of these, 18 were sovereign-driven, related to India‘ sovereign downgrade. Excluding sovereign-driven actions, metals and mining, energy and property accounted for the most among the negative actions, with each sector receiving nine. There were no positive rating actions in Q2.

Among the ratings in Moody’s Asia Pacific corporate portfolio, 29 percent had negative implications, up from 26 percent in Q1 2020 and the highest level since 3Q 2016. Companies that remain the most affected were auto and gaming companies, with over 50 percent of issuers carrying ratings with negative implications.

At the same time, the share of ratings with a stable outlook fell to 69 percent from 71 percent over the same period. Finally, there were five rated defaults in 2Q 2020, among which three were Chinese companies and two were Australian. The five defaults bring the total number of rated defaults in 1H 2020 to eight.

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