(Repeat for additional subscribers)
Nov 15 (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
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'
-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
-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.