Fitch Revises Indonesia Rating Outlook to Positive

Global credit rating agency Fitch Ratings affirmed Indonesia’s long-term foreign- and local-currency issuer default ratings at ‘BBB-’ but revised the outlook from ‘stable’ to ‘positive’.

The improvement is primarily attributed to Indonesia’s low government debt burden and favorable economic growth outlook, while structural reforms (the government’s economic policy packages that have been launched since September 2015 as well as the tax amnesty program) are gradually improving the nation’s business and investment climate, Antara news agency reported.

Fitch Ratings further stated that it considers Indonesia’s sovereign exposure to banking sector risks as “limited”. Private credit represents only 36% of Indonesia’s gross domestic product and the banking system’s health is relatively strong, although risks built up in the previous credit cycle imply a more challenging operating environment.

Despite the challenging global economic context, Indonesian authorities appear to shift away from chasing their earlier (and too ambitious) economic growth targets and instead focus on macroeconomic stability and structural changes that should boost the economy in the longer term.

 Therefore, the Indonesian government presented a realistic 2017 State Budget. In fact, on some matters, the government set an “unambitious” target (in an apparent effort to over-deliver rather than under-deliver).

Fitch Ratings has become more positive about Indonesia’s medium and long term economic growth due to the government’s reform efforts. Eye-catching reforms include a reduction in the number and duration of bureaucratic procedures—reflected by a strong improvement in Indonesia’s ranking in the World Bank’s Ease of Doing Business indicator from 106 to 91—and a more standardized approach to minimum wage setting, which should prevent sudden and steep minimum wage growth in Indonesia (a big burden for foreign direct investment).  However, Fitch Ratings also state that the real impact of the government’s reform program on investment and GDP growth will depend on the implementation and to what extent the central government continues to create a more conducive investment climate.

Regarding the monetary and exchange-rate policy of Indonesia’s central bank, Fitch Ratings said it has been effective in weathering market turmoil, such as through ensuring comfortable foreign-exchange buffers, even though the policy stance could potentially be tested again in 2017 amid general emerging-market turbulence and a strengthening US dollar.