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Jan 15 (The following statement was released by the rating agency)
The last-minute intervention at the weekend by Indonesia's politicians to avert a significant disruption of mining activity and exports, should limit any further stress on the sovereign rating for now, says Fitch Ratings. Indonesia has implemented a new mining law which aims to raise the value-added nature of mining sector activity by limiting exports of certain raw, unrefined products. This comes at a time when the Indonesian rupiah has fallen nearly 22% from a year ago amid concerns over external financing needs and the onset of Fed tapering.
A key near-term uncertainty surrounding the country's external payments position has been lifted. However, medium-term risks remain, as the manner and the late-stage at which the underlying issues were addressed does little for long-term investor sentiment.
The presidential regulation comes at a particularly sensitive time, as an outright ban on mineral exports without the granted exemptions could have weighed on Indonesia's external balance - which has emerged as a point of vulnerability for the sovereign's overall credit profile (BBB-/Stable). This is evident from its gross external funding requirement which is expected at 50% of reserves in 2014, and which is more stretched than the 36% for 'BBB-' peers.
A broad-based ban on exports would not have only damaged international investors' perceptions of doing business in Indonesia, but also slowed mining output and weighed on overall economic activity.
Indonesia's current account (CA) deficit seems to be improving as the trade balance has moved into surplus recently, but the process remains slow and vulnerable to external shocks. We project the CA deficit at 3.1% for 2014 versus 3.6% estimated in 2013. Tighter monetary policies have been implemented in the second half of 2013 to lower credit growth and rein in aggregate demand.
This policy adjustment, coupled with greater currency flexibility, is helping to bring about a trade balance adjustment and a gradual rebuilding of foreign-currency reserves - which have risen to USD99.4bn by end-December 2013 from a low of USD92.7 in July 2013. Reserves will be further boosted in January by the sovereign's USD4bn debt issue. These are credit supportive developments, but they remain at an early stage and could have been pressured by a sudden stoppage of mining exports.
Mineral exports will still face some impediments. These now have to meet certain levels of "purity", and cannot be exported in their raw or entirely unprocessed form. Precise details of exemptions remain unclear, but mineral exports will now be subject to a 20% tax even after they meet the "purity" level. In addtion, the export tax is set to rise much higher in 2016, to 60%, to get producers to raise the refining (processed) content to much higher levels by 2017.
The Indonesian authorities continue to pursue the longer-term objective of raising the domestic value-added content in mining activity. But the speed and manner in which these measures have been introduced and communicated to industry and market participants have often raised uncertainties over production, exports, and the broader economy. It is far from clear if the recent, last-minute, intervention does much to reassure long-term investor sentiment.
We expect the export restrictions to maintain upward pressure on bauxite and nickel prices, as Indonesia has been one of the biggest sources of new nickel supplies over the last few years. There are exemptions for miners that have pledged to build smelting and refining facilities, while the restrictions still will affect smaller, unregulated miners. These miners account for a significant portion of bauxite and nickel ore output, and the government has been keen to crack down on them because of concerns they are wasting resources by recovering only the highest-grade ores. The overall impact on prices may be dampened or delayed by stockpiling in China, which has at least six months' supply of ore.