S&P: Ratings On Indonesia Raised To ‘BBB-/A-3’ On Reduced Fiscal Risks; Outlook Stable


  • In our view, the Indonesian authorities have taken effective expenditure and revenue measures to stabilize the country’s public finances despite the terms of trade shock.
  • As a result, we expect net general government debt will stabilize near the current low levels while the budget deficit will gradually decline.
  • We are therefore raising our long-term sovereign credit rating to ‘BBB-‘, from ‘BB+’. We are also raising our short-term sovereign credit rating to ‘A-3’ from ‘B’. In addition, we are raising our ASEAN regional scale long-term rating to ‘axA-‘ from ‘axBBB+’ and affirming our short-term rating at ‘axA-2’.
  • The outlook on the long-term rating is stable because we see upside and downside risks to the ratings are broadly balanced.
On May 19, 2017, S&P Global Ratings raised its long-term sovereign credit 
ratings on the Republic of Indonesia to 'BBB-' from 'BB+'. The outlook is 
stable. We also raised our short-term sovereign credit ratings on Indonesia to 
'A-3' from 'B' and our ASEAN regional scale long-term rating to 'axA-' from 
'axBBB+'. In addition, we affirmed the short-term ASEAN regional scale rating 
at 'axA-2'.

We raised the ratings to reflect our assessment of reduced risks to 
Indonesia's fiscal metrics. We believe the government's increased focus on 
realistic budgeting has reduced the likelihood that a shortfall in future 
revenue would widen the general government deficit significantly beyond what 
we expect now. This also reduces the risk of a rising net general government 
debt ratio and debt servicing burden. Instead, we now anticipate that net debt 
will remain at the moderate levels of below 30% of GDP.

The government's new focus on realistic budgeting has lowered the risks that 
budget deficits will widen significantly when government revenue disappoints. 
Generating revenue from Indonesia's tax system has been a structural challenge 
confronting successive Indonesian governments. The ratio of general government 
revenue to GDP in Indonesia is the second lowest of all 67 investment-grade 
sovereigns, higher only than that of the Emirate of Sharjah. This leads to 
high interest burdens as a share of revenues, despite Indonesia's relatively 
low government debt stock (see: Sovereign Risk Indicators, an interactive 
version is available at www.spratings.com/sri). 

Partly due to weaker commodity prices, tax receipts have been well below 
initial budget projections at least for the past three years. This had left 
the government having to cut spending toward the later part of the fiscal year 
(which runs from January to December) in order to keep the budget deficit 
within the legal ceiling of 3% of GDP. The 3% cap on the budget deficit 
written in Indonesia's State Finances Law 17 of 2003 has kept Indonesian 
governments focused on the fiscal balance. Consequently, the general 
government deficit in the five years to the end of 2016 averaged a modest 2.2% 
of GDP despite a sometimes challenging external environment.

In 2017, the government is projecting tax receipts that are lower than 
projections in the 2016 budget. Although this still represented an increase of 
more than 15% over realized tax collection a year earlier, the increase is 
significantly lower than those of earlier years. We expect this cautious 
stance toward budgeting fiscal revenue to persist over the next few years. 

At the same time, we expect better revenue collection to result from the data 
collected during the just-concluded tax amnesty. We also expect increased 
control over fiscal spending with subsidy reforms being extended to 
electricity subsidies from 2017. These developments should ensure that the 
fiscal deficit remains below 2.5% of GDP over the next three to four years 
despite the government's intention to expand its infrastructure program to 
address the existing shortfall in infrastructure and basic services. Together 
with the greater focus on realistic budgeting, we believe that this will 
contain the risk of fiscal slippage leading to larger fiscal deficits than 
what we currently project. Despite the broader vulnerabilities of the economy 
to external shocks, we consider strong public finances a cornerstone of our 
investment-grade rating on Indonesia. 

We also forecast a stable general government debt ratio over the next few 
years, reflecting the relatively stable projected fiscal balance. In some 
recent years, general government debt had increased significantly more than 
the size of the budget deficit. In the five years to 2016, for instance, the 
average increase was 3.2% of GDP annually. This was due to the impact of the 
depreciation of the Indonesian rupiah during this period on the size of the 
government's foreign currency debts as measured in local currency terms. More 
than 40% of government debt is denominated in foreign currencies at the end of 
2016. We expect the change in government debt to be more in line with the 
fiscal deficit over the next few years, given our relatively stable outlook 
for the rupiah exchange rate. We project net general government debt to remain 
well below 30% of GDP. On top of this relatively moderate debt burden, we 
expect limited contingent liabilities facing the government over the next few 
years. That said, Indonesia continues to display an elevated interest burden 
relative to revenues, a reflection of the aforementioned difficulties of 
boosting tax revenues. We now consider the fiscal factors to be a rating 
strength, while institutional, monetary, and external factors are considered 

Indonesia has exhibited effective policymaking in recent years to promote 
sustainable public finances and balanced economic growth. Political and policy 
institutions in Indonesia are generally stable and free of challenges to their 
legitimacy. The Indonesian society is generally cohesive despite the expanse 
of the country over many islands. News and information generally flow freely 
in Indonesia, with key policy and other changes well publicized and debated. 
Indonesia publishes timely economic, fiscal, and financial statistics in great 
detail. At the same time, Indonesia continues to trail many similarly rated 
sovereigns in perceptions regarding governance issues, such as control of 
corruption. We believe this has stunted growth-enhancing, inward foreign 
direct investment.

We believe economic and financial policy settings have become more predictable 
recently. The government has built a political coalition with a parliamentary 
majority. Despite the government having a greater number of political parties, 
it has managed to appoint individuals who are generally viewed as competent to 
the key economic ministerial positions. 

Bank Indonesia, the central bank, has been an important institution in 
Indonesia's ability to sustain economic growth and attenuate economic or 
financial shocks. Over the past decade or so, inflation in the country has 
been broadly in line with those of its major trading partners. The central 
bank has had significant operational independence to pursue its monetary 
policy target since July 2005, when it formally adopted the Inflation 
Targeting Framework. It relies increasingly on market-based instruments in 
implementing monetary policy in a financial system that has grown steadily in 
recent years. Monetary flexibility has been augmented in recent years by the 
increasing flexibility of the rupiah, a floating currency.

Indonesia's external debt burden has risen over the past five years. External 
debts amount to a little above one-third of GDP at the end of 2016. The 
country's current account receipts (CAR), however, are small in relation to 
the size of the economy and have fallen relative to economic output over the 
past five years. Partly reflecting this decline, total external debt--net of 
liquid assets held by the public and financial sectors--has risen to just 
below annual CAR in 2016 from less than half in 2011.

The greater flexibility of the rupiah since 2013 should benefit the external 
metrics over the next three to five years. The current account has narrowed 
with the rupiah depreciation since 2013. At the same time, the rupiah 
flexibility has allowed the central bank to increase its foreign exchange 
reserves. Together with policy measures to discourage short-term external 
borrowing, gross external financing needs (current account payments plus 
short-term external debt) have declined to 94% of CAR in 2016 from almost 100% 
in 2014. We expect this external liquidity ratio to continue to decline (in 
other words, improve) in the next three years. This should go some way toward 
mitigating the risk of marked deterioration in the cost of external financing 
that we believe Indonesia continues to face in times of volatility in 
international financial markets.

The main weakness remains the economic risks facing the country, where the 
economy is still considered lower middle-income and, as a commodity exporter 
and capital importer, subject to external shocks. A key rating constraint is 
Indonesia's GDP per capita, which we estimate at US$3,800 in 2017. We estimate 
the trend growth rate of GDP per capita to be slightly above 4% per year. 
Growth of the Indonesian economy is largely dependent on domestic demand in 
recent years while exports have diminished in importance due to the decline in 
commodity prices. Improved global demand and stabilizing prices, however, have 
contributed to a strong rebound in exports early in 2017.

The stable outlook reflects our view that the policy environment and economic 
conditions will keep external and fiscal metrics close to current levels over 
the next one to two years. We could raise the long-term ratings if external 
and fiscal balances significantly outperform our current expectations. 

Conversely, downward pressure on the rating could emerge if we expect trade 
and fiscal balances over the next three to five years to be materially worse 
than our current projections. Indications of pressure on the rating are net 
general government debt and budget deficits surpassing 30% and 3% of GDP, 
respectively, in a sustained way; or external liquidity (gross financing 
requirements as a percentage of current account receipts and foreign exchange 
reserves) consistently surpassing 100%, which could be triggered by another 
negative terms of trade shock.