July 20, 2017 / 1:07 AM / 4 months ago

Fitch Affirms Indonesia at 'BBB-'; Outlook Positive

(The following statement was released by the rating agency) HONG KONG, July 19 (Fitch) Fitch Ratings has affirmed Indonesia's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB-' with a Positive Outlook. The issue ratings on Indonesia's senior unsecured foreign- and local-currency bonds and foreign-currency sukuks - issued through Perusahaan Penerbit SBSN Indonesia - have also been affirmed at 'BBB-'. The Country Ceiling has been affirmed at 'BBB' and the Short-Term Foreign- and Local-Currency IDRs at 'F3'. The senior unsecured short-term issues have also been affirmed at 'F3'. KEY RATING DRIVERS Indonesia's ratings balance a low government debt burden, favourable growth outlook and limited sovereign exposure to banking-sector risks with weak - but strengthening - external finances compared with 'BBB' category peers and some lagging structural factors, including governance standards and a still difficult - but improving - business environment. The Indonesian authorities have continued to strengthen their macroeconomic policy record with a focus on macro stability and sustainable growth since Fitch revised Indonesia's Outlook to Positive from Stable in December 2016. Bank Indonesia's (BI) monetary and exchange-rate policies have supported a further increase in its foreign-exchange buffers, which reached a historic high of USD125 billion in May 2017, 35% above the low after BI's "taper tantrum" interventions in the summer of 2013. The slowdown in the fast rise in corporate external debt, in part due to BI's external borrowing requirements implemented since 2015, has also contributed to improved resilience of Indonesia's external finances. Nevertheless, Indonesia is still dependent on commodities for its exports and portfolio inflows to finance a persistent, but manageable, current-account deficit, which Fitch expects to remain roughly stable at close to 2.0% of GDP through 2019. Credible GDP growth assumptions in the revised budget for 2017 were recently approved in parliament, illustrating an apparent shift away from the overly ambitious annual growth targets adopted in budgets in the past several years. Fitch expects real GDP growth to rise to 5.2% in 2017 and 5.6% in 2018, from 5.0% in 2016. Indonesia's GDP growth still compares favourably with peers ('BBB' median: 2.8% in 2017), even though it is unlikely to soon return to the above-6% levels it enjoyed prior to the collapse of the commodity boom in 2012. A strong structural reform drive since September 2015 is gradually improving the difficult business environment, including a reduction in the number and duration of bureaucratic procedures and a more standardised approach to minimum wage setting. The reform agenda could lose momentum if political and religious frictions become a distraction from economic policy-making as the presidential elections of 2019 approach. The Jakarta gubernatorial elections held earlier this year illustrate how such issues can dominate the electoral discourse. In addition, measures perceived as favouring domestic businesses could deter foreign investment. Fitch's forecast for low general government debt burden of 28.2% of GDP in 2017 compares well with the 'BBB' median of 41.2% and helps anchor Indonesia's investment grade rating. Fitch does not expect government debt to rise significantly as the government is adhering to a self-imposed budget-deficit ceiling of 3% of GDP. The benefits of the tax authority's enhanced access to domestic and foreign bank data after the tax amnesty, as well as recently issued legislation on reporting requirements and negotiated international treaties for data exchange, are still uncertain, but form an upside risk to the government's very low revenue intake in the coming years. Fitch considers the sovereign's exposure to banking-sector risks as limited. Private credit represents only 36.9% of GDP and the banking system's health is relatively strong, although risks built up in the previous credit cycle imply a more challenging operating environment. This has led to deferral of private-sector capital expenditure and has increased gross non-performing loans to 3.1% of total assets in April 2017, from a low of 1.8% at end-2013. However, the banking sector's capital adequacy ratio is strong, at 22.6% in April 2017. The Indonesian economy continues to exhibit some structural weaknesses, notwithstanding the improvements resulting from the reform agenda, and is less developed on a number of metrics than many of its peers. Average per capita GDP remains low at USD3,823 compared with the 'BBB' range median of USD10,459, while governance continues to be weak, as illustrated by a low score for the World Bank governance indicator (41st percentile versus the 'BBB' median of 58th percentile) and Transparency International's corruption index (90th out of 176 countries). SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Indonesia a score equivalent to a rating of 'BBB' on the Long-term Foreign-Currency IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR by applying its QO, relative to rated peers, as follows: - External Finances: -1 notch, to reflect Indonesia's vulnerability to changes in market sentiment and portfolio shifts, as a large part of government debt is held abroad or financed in foreign currency, and its relatively high net external debt. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The main factors that, individually or collectively, could trigger positive rating action are: - Continued strengthening of the external finances, making Indonesia less vulnerable to sudden changes in foreign-investor sentiment, for instance through lower commodity export dependence or structurally higher foreign direct investment inflows. - Continued improvement of the business environment, tax compliance and governance standards. - Maintenance of strong and sustainable GDP growth. The rating Outlooks are Positive. Hence, Fitch does not anticipate a high probability of negative action over the forecast period. However, the main factors that could see the ratings revert to Stable Outlook are: - A sharp and sustained external shock to foreign and/or domestic investors' confidence with the potential to cause external financing difficulties. - A rise in the public debt burden, for example caused by breaching the budget-deficit ceiling. - A weakening in macroeconomic prospects, for example from a change in the authorities' focus on monetary stability or reforms to the business environment. KEY ASSUMPTIONS - The global economy performs broadly in line with Fitch's Global Economic Outlook (June 2017) Contact: Primary Analyst Thomas Rookmaaker Director +852 2263 9891 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Sagarika Chandra Associate Director +852 2263 9921 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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