[vc_row][/vc_row][vc_column][/vc_column][vc_row_inner][/vc_row_inner][vc_column_inner][/vc_column_inner][mk_fancy_title size=”35″ font_family=”none”]Indonesia’s Sovereign Credit Rating is upgraded due to the strong performance of its economy [/mk_fancy_title][vc_column_text]
Rating and Investment Information, Inc (R&I), a Japan-based provider of credit ratings, investment appraisal and information services, announced that it has upgraded Indonesia’s sovereign credit rating from BBB- (positive outlook) to BBB (stable outlook) per 7 March 2018. Last December, Fitch Ratings had already upgraded Indonesia’s long-term foreign- and local-currency issuer default ratings to BBB (stable outlook), from BBB- previously.
The decision of R&I is based on the strong performance of the Indonesian economy, with inflation being low and stable, while fiscal deficits have been reined in, and Indonesian government debt remained low. R&I added that the economy of Indonesia is becoming more resilient to external shocks as the current account deficit is under control and foreign exchange reserves recently touched an all-time high of USD $132 billion (end-January 2018). Meanwhile, the government-led infrastructure development program shows some progress, while the nation’s investment climate is also improving.
R&I also believes that upcoming elections (local elections in mid-2018 and legislative as well as presidential elections in mid-2019) will not distort the focus of the government on macroeconomic stability and reforms. Hence, it upgraded Indonesia’s sovereign credit rating to BBB (stable outlook) per 7 March 2018.
However, although R&I welcomes the governments efforts to reinforce the country’s tax-collecting base, it emphasizes that the Indonesian government needs to improve its tax revenue. This is one of the key issues that needs to be addressed by the government.
Regarding Indonesia’s gross domestic product (GDP) growth, R&I stated that it detected strong growth in Indonesia at 5.1 percent year-on-year (y/y) in full-year 2017. Growth is expected to accelerate this year on the back of robust private consumption as well as expanding investment and exports. This economic trend is expected to continue for the foreseeable future.
Meanwhile, Bank Indonesia’s monetary policy remained prudent, hence inflation is expected to remain in the range of 3-4 percent (y/y). However, credit growth remained stagnant despite several interest rate cuts in recent years. Still, R&I believes that sluggish credit growth with not pose risks to the country’s financial system stability.
Indonesia’s current account deficit eased to 1.7 percent of GDP in 2017 but is likely to widen to 2.0 percent of GDP in 2018 due to rising imports. Meanwhile, foreign debt is low at 34.82 percent of GDP at end-2017.
The Indonesian government’s budget deficit was kept at 2.48 percent of GDP in 2017. For 2018 the government aims to reduce the deficit to 2.2 percent of GDP, partly supported by a planned 20 percent increase in tax revenue. According to R&I this is a realistic tax revenue growth target due to higher crude oil prices as well as the government’s efforts to increase tax-collecting capacity.
On the expenditure front, the initiatives for subsidy reduction and public investment expansion remain firmly in place. Meanwhile, central government outstanding debt remained low at 28.98 percent of GDP as of end-2017. A potential risk, however, is that the ratio of domestically issued government bonds held by non-residents is high at around 40 percent. A big chunk of bonds in foreign hands, means there is a risk of sudden outflows in times of global economic turmoil.
In response to the R&I statement, Bank Indonesia Governor Agus Martowardojo stated that “the upgrade of Indonesia’s rating to BBB, the third consecutive time following the rating upgrades from Fitch Ratings and Japan Credit Rating Agency, confirms international stakeholders’ confidence in Indonesia’s strong economic fundamentals”.
R&I had previously revised its outlook for Indonesia’s sovereign credit rating from stable to positive and affirmed Indonesia’s BBB- (investment grade) rating on 5 April 2017.