(Repeat for additional subscribers)
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.