RPT-Fitch: Policy Management is Key in India and Indonesia
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Aug 22 (Reuters) - (The following statement was released by the rating agency)
Policy management will be the key factor in determining whether economic and financial stability is maintained in India and Indonesia following the intensified pressure on currencies and asset prices. These pressures have exceeded those of other emerging Asian economies, but Fitch Ratings does not view these developments as a trigger for rating action at this point. The ratings already incorporate both a recognition of vulnerabilities and some tolerance for volatility in market conditions.
Nonetheless, market anticipation of Fed tapering appears to have prompted some shift in investor perceptions of the risks. Moreover, the current market volatility could persist for a while in view of continuing uncertainty over the timing and magnitude of an eventual unwinding of global central banks' quantitative easing.
The sharp weakening of both the Indian rupee and the Indonesian rupiah reflect large or growing current account deficits whose funding has been complicated by a reversal of global portfolio capital. Demand growth in excess of current supply-side capabilities could lead to a further widening in external imbalances. Moreover, rapid private-sector credit growth, widening fiscal deficits or sustained higher inflation could lead to a broader and more sustained loss of confidence among investors. This could potentially undermine economic and financial stability, and ultimately lead to negative rating action.
Conversely, demonstration by the authorities that they remain committed to managing policy consistent with sustainable growth would support credit profiles.
We believe there are three key reasons for maintaining a Stable Outlook on both these countries' 'BBB-' sovereign credit ratings. First, foreign-exchange reserves have come under pressure, but are still sizeable. Indonesia's reserves, at USD93bn at end-July (down from USD106bn a year ago), provide 4.5 months of import cover. India's foreign-exchange reserves have also fallen - to USD279bn as of mid-August (down from USD291bn a year ago), but still provide around 5.5 months of import cover. In both countries, foreign-exchange reserves remain higher than residual maturity short-term debt.
Second, both countries have adjusted their economic policies. In India, we expect fiscal policy restraint to persist, in line with last year's result, with the budget deficit remaining within 5% of GDP. Indonesia's policy rates have been raised by 75bp since May, and the fiscal deficit is likely to remain around 2% of GDP.
Fitch believes a central factor will be the strength of official commitment to managing demand so as to deliver sustainable growth without an intensification of vulnerabilities - such as fiscal deficits, inflation and/or external imbalances.
Lastly, structural reforms which may be politically difficult to achieve - such as fuel subsidy reforms - are being undertaken in both countries, and these should help to shore up public finances over the medium-term, potentially supporting domestic savings and, ultimately, reducing external deficits.
Additional supply-side reforms could boost sustainable growth rates in both countries and attract greater foreign investment inflows, but Fitch expects these will take more time to implement. Such initiatives would be credit-supportive. Fitch does not expect near-term implementation of large-scale supply-side reforms in either country in view of approaching elections in H114.
Fitch's Asia-Pacific Sovereign team will be hosting a teleconference on Monday 26 August 2013 at 2.30pm Hong Kong/Singapore time to discuss the above issues and other credit developments. Details are available at
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