JAKARTA (TheInsiderStories) – Fitch Ratings has affirmed Indonesia’s long-term foreign-currency issuer default rating (IDR) at ‘BBB’ with a stable outlook, according to its latest credit assessment report on Friday (01/24). While the country’ gross domestic product (GDP) growth to marginally accelerate to 5.1 percent in 2020 and 5.3 percent in 2021 from 5.0 percent in 2019, significantly higher than the ‘BBB’ category median of 2.8 percent for 2019.
“Indonesia’s rating balances a favorable medium-term growth outlook and a small government debt burden,” it said, noting the country’ growth is likely to remain resilient in the next few years, underpinned by a renewed public infrastructure push and reform agenda during the second term of President Joko Widodo.
Domestic demand in 2020 is likely to be supported by some monetary policy easing, while the contribution to the growth of net exports may continue to be negatively affected by a weakened terms-of-trade, the report said.
The government’s plans for infrastructure development over the next five years are ambitious and include the construction of a proposed new capital in East Kalimantan, Fitch said. The government estimates that the total cost of developing the new capital city over a number of years would amount to US$31 billion, of which it expects a large part to be financed by the private sector.
Parliament is scheduled to discuss two omnibus laws in the next few months, which are likely to contain a number of long-awaited amendments to regulations related to taxation and the business environment. The labor law, which is still being prepared by the government, reportedly will aim to simplify the regulatory framework, ease land acquisition, reduce the number of items on the negative investment list, and ensure greater labor market flexibility.
The latter would be significant, given Indonesia’s high severance pay requirements. Whether far-reaching reforms will be passed in Parliament remains uncertain, however, given their contentious nature in the political debate, Fitch said.
Fitch expects the government deficit to remain stable in 2020 at 2.2 percent of GDP, higher than the 1.8 percent budget target. The government revenue of 14.0 percent of GDP in 2019 and 14.2 percent of GDP in both 2020 and 2021, the lowest in the ‘BBB’ rating category.
The agency sees the most prominent change in the omnibus law on taxation, however, is a gradual reduction in corporate tax rates between 2021 and 2023 from 25 percent to 20 percent, which is likely to offset some of the revenue gains from other measures in the short run before any potential medium-term gains materialize through higher investment.
Indonesia’s government debt is low at a Fitch-estimated 30.1 percent of GDP in 2019. However, the debt burden is higher than peers’ when measured as a ratio against low general government revenue, at 215.3 percent.
“We expect the debt/GDP ratio to rise only marginally in the next few years, assuming the government continues to adhere to a self-imposed deficit ceiling of 3 percent of GDP,” Fitch said.
State-owned enterprises (SOEs) have been leveraging up their balance sheets considerably since mid-2017 as a result of their important role in the government’s infrastructure development. The gross combined debt of SOEs increased by 1.5pp of GDP in the 24 months through September 2019 to 5.9 percent of GDP. This trend is likely to continue in the next few years, given the government’s ambitious infrastructure program, it said.
Fitch forecast headline inflation to average 3.2 percent in 2020 and 3.3 percent in 2021, compared with 3.0 percent in 2019. Inflation has been under control in recent years, staying within Bank Indonesia’s (BI) target range of 1pp above or below 3.5 percent.
Low inflation and the recent strengthening of the rupiah exchange rate should provide BI room to cut its policy rate by at least another 25bp this year after the total reduction of 100bp in 2019, which was delivered in combination with macro-prudential easing, Fitch said.
Favorable market conditions have facilitated a further build-up of foreign-currency reserves to $129 billion in December 2019, covering 6.2 months of current account payments, similar to the current ‘BBB’ median of 6.1 months.
Fitch expects the current account deficit to remain at 2.7 percent of GDP in 2019 and 2020, and to slightly falling to 2.6 percent in 2021, with net FDI inflows covering 1.6 percent of GDP, or more than half of the gap, leaving the remainder to be financed by portfolio inflows. Fitch considers private credit represents only 36.0 percent of GDP and the banking sector’s capital adequacy ratio remains strong, at 23.7 percent in November 2019.
Fitch sees the Indonesian economy continues to exhibit some structural weaknesses relative to peers. The average per capita GDP remains low at $4,151 compared with the current ‘BBB’ range median of $12,152, while governance continues to be weak, as illustrated by a low score for the World Bank governance indicator (47th percentile versus the current BBB median of 56th percentile).