RPT-Fitch Affirms Indonesia at 'BBB-'; Outlook Stable
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Nov 15 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Indonesia's Long-Term Foreign- and Local-Currency Issuer Default Ratings at 'BBB-'. The issue ratings on Indonesia's senior unsecured foreign- and local-currency bonds are also affirmed at 'BBB-'. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at 'BBB' and the Short-Term Foreign-Currency IDR affirmed at 'F3'.
KEY RATING DRIVERS
The affirmation of the ratings and Stable Outlook reflect the following factors: -The Indonesian authorities managed to mitigate the negative impact on external balances after asset markets came under pressure over the summer following international investors' expectations that the US central bank would begin to unwind its monetary stimulus. In particular, Bank Indonesia helped to preserve foreign reserves by allowing the exchange rate to depreciate and raising its policy rates by 175 bp in total since June to 7.5%. Moreover, market access remained intact for both the sovereign and financial institutions.
-Indonesia's sovereign credit profile benefits from stronger and less volatile economic growth than its peers rated in the 'BBB' range (other sovereigns rated 'BBB+', 'BBB' or 'BBB-'). Fitch projects GDP growth to slow to 5.3% in 2014 from 5.5% in 2013 and 6.2% in 2012 due to the adjustment of the external finances, fading consumer confidence and constrained income from commodities. Even with lower sustained growth in the order of 5%-5.5%, real GDP growth remains substantially higher than the median for the 'BBB' range (3.3% for 2013). Indonesia's debt dynamics is supported by such high growth.
-Although the fiscal deficit is likely to widen to 2.5% of GDP in 2013 from 1.9% in 2012, a fiscal rule commits the Indonesian government to restraint and ensures that public finances continue to be strong. At some 25% of GDP, public debt remains low compared to the median of 39% for sovereigns rated in the 'BBB' range.
-The banking system is well capitalized. While Fitch's macro-prudential indicator points to relatively high risk (MPI 3) because of strong credit growth, there are no signs of strain for the system as a whole. Stress tests performed by Fitch show that the major banks are sufficiently resilient to withstand some worsening of domestic operating conditions and increased pressure on the rupiah. Fitch notes that Indonesia is introducing a new regulatory authority at a time when growth is slowing and there is potential of renewed external market pressures.
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well balanced.
The main factors that, individually or collectively, might lead to negative rating action are as follows:
-Both insufficient policy management of renewed market pressures, such as support for the exchange rate at an unsustainable level leading to declining reserves, and a policy stance that would hamper gradual adjustment of the external imbalances. A push by policy makers for unsustainable growth at the expense of appropriate external adjustment may, for example, be indicated by continued high levels of inflation or credit growth, or a persistent wide current account deficit.
-A sharp and sustained external shock to foreign and/or domestic investors' confidence, leading to a significant weakening of the external finances. At the same time, some strains on the credit profile as a result of external market pressures are not inconsistent with a 'BBB-' rating.
The main factors that, individually or collectively, might lead to positive rating action are as follows:
-Implementation of policies that make the economy more resilient to external pressures and less vulnerable, in case new market pressures arise. This could include sustained improvement in Indonesia's external position and substantial deepening of the financial system.
-A track record of implementation of reforms and policies to improve the business environment and subsequently raise potential GDP growth, for example, by making it easier to start a business, removal of infrastructure bottlenecks and ensuring minimum wage setting in line with productivity.
The ratings and outlooks are sensitive to a number of assumptions, including:
-The tapering of quantitative easing by the US Federal Reserve will be orderly, with no sudden stop of capital flows to emerging economies with substantial current account deficits.
-Indonesian authorities choose stability over economic growth. This is a crucial assumption under affirmation of the ratings and stable outlook. Fitch assumes that policy makers will allow the economy to cool down, even though the agency considers the formal projections for GDP growth by the government (6%) and Bank Indonesia (5.8%-6.2%) for 2014 too optimistic, and not in line with a sufficient reduction in the current account deficit to deliver a sustainable external position.
-The government continues to manage the public finances in a disciplined manner. -No significant political unrest related to the elections in 2014. -International oil prices evolve broadly in line with Fitch's projections of USD100/bbl in 2014-15.
-No significant fall in the international prices of those commodities that form an important part of Indonesia's exports. In particular, no economic crisis is assumed in Indonesia's key trading partner China.