JAKARTA (TheInsiderStories) – Rating and Investment Information, Inc. (R&I) upgrades Indonesia’ sovereign credit rating from BBB/stable outlook to BBB+/stable outlook (investment grade), the agency announced on March 17. President Joko Widodo, said the rated, is firmly implementing policies to strengthen economic growth potential, on the back of a political foundation solidified in his second term.
Supported by such policy efforts, the economy is expected to continue stable growth over the medium term. The government also keeping fiscal deficits in check, the government maintains its debt ratio at a low level. Foreign reserves are ample relative to short-term external debts.
The country’ economic resilience to external shocks is retained under a policy stance that emphasizes macroeconomic stability and fiscal discipline. Based on these factors, R&I has upgraded the foreign currency issuer rating to BBB+.
Real gross domestic product (GDP) has been growing around 5 percent a year. The real GDP growth rate for 2019 was 5.02 percent, affected by a slowdown in investment and external demand. As the global spread of the novel coronavirus could strain growth in the Indonesian economy, real GDP growth may fall below 5 percent in 2020.
The government and the central bank are working to shore up the economy and maintain macroeconomic stability. Given the country’ underlying economic strength which remains intact and a stable political environment, R&I expects the economy to start to recover if the epidemic is brought under control.
The government aims to enact an omnibus law to combine dozens of laws into one and carry out reforms, in an initiative to improve the investment climate and create jobs. If enforced, the law would stimulate capital investment in the private sector, possibly contributing to reinforcing economic fundamentals and bolstering growth in the medium to long term.
The current account balance has been in a small deficit. The deficit for 2019 narrowed from a year earlier to 2.7 percent of GDP. The balance will likely be in a deficit of 2 – 3 percent in 2020 and afterwards.
Foreign reserves cover about 7.4 months of imports and servicing of government external debt repayment, and are equivalent to around twice its external debt due within one year. Foreign exchange risk in the private sector has decreased as a result of the central bank’ introduction of measures to contain foreign exchange risk, including regulations for hedging foreign currency-denominated debt.
Accordingly, there is little concern about foreign currency liquidity. The central government fiscal balance for 2019 was a deficit of 2.2 percent of GDP, which was larger than in the previous year. This is primarily attributable to lower revenue collection due to the declining global and domestic economic performance as well as falling commodity prices and acceleration of value added tax refunds and corporate income tax restitution.
However, the government maintains its commitment to ensure fiscal discipline. In the 2020 budget, the government projects a deficit of 1.76 percent of GDP. It increased budget allocations for infrastructure development, while maintaining the ratio of education and healthcare budget to total expenditure. Budget allocations for energy subsidies were reduced, representing a lower percentage of total expenditure.
R&I positively views the government’ efforts to improve the quality of expenditure to move forward its policy priorities of enhancing human capital and strengthening competitiveness with limited fiscal resources. In 2020, the fiscal deficit will most likely rise above the government’s target.
In its policy management, the government has so far adhered to the rule of containing fiscal deficits at 3 percent of GDP or lower. Given that the current situation requires proactive fiscal policies to support the economy and outstanding central government debt as of end-2019 was estimated low at 29.9 percent of GDP, R&I believes that a temporary deficit increase will not affect the rating.
In response to the decision, governor of Bank Indonesia, Perry Warjiyo stated that going forward, the central bank will remain cautious and continue to monitor global and domestic economic developments, including the impact of COVID-19. The Bank also will strengthening the policy mix and coordination with the government and other relevant authorities to maintain macroeconomic stability, boost structural reforms and support growth momentum.
Previously on April 26, 2019, R&I had affirmed Indonesia Sovereign Credit Rating at BBB/stable outlook.
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