Jakarta. International credit rating agency Fitch Ratings has maintained Indonesia's long-term sovereign debt rating at "BBB," or a notch above investment grade, with a stable outlook, on the back of the country's economic resilience to global challenges.
The decision is supported by a low government debt burden and good economic growth prospects that counterbalance external challenges stemming from high dependence on external financing and structural indicators that are still weaker than the country's peers.
"Indonesia's external finances are stronger than during the 2013 'taper tantrum,' resulting from a disciplined monetary policy stance in the past few years and macro-prudential measures that have helped curb a sharp rise in corporate external debt," Fitch said in a statement.
It referred to a period of capital selloffs in emerging markets after the United States Federal Reserve announced that it was scaling down its monetary stimulus program, causing the rupiah to lose more than 20 percent of its value against the US dollar.
The government's debt burden is expected to remain low, at 30.4 percent of gross domestic product, by the end of this year – compared with the BBB median of 41.1 percent – which will be maintained by adhering to the country's budget deficit ceiling of 3 percent of GDP.
The government aims to reduce fiscal deficit to 2.1 percent of GDP this year and 1.8 percent in 2019, from 2.5 percent in 2017, compared with the BBB median of 2 percent.
Fitch now expects Indonesia's economic growth rate to accelerate to 5.2 percent in 2019 and 5.3 percent in 2020, from 5.1 percent this year, driven by a public infrastructure spending push, despite slow growth in investment.
Some weakness remains. The current-account deficit is widening and it was still reliant on foreign capital to plug the deficit; 38 percent of local currency government debt securities were held by foreigners in July 2018.
"Trade tensions could cause the current-account deficit to widen further than we expected [2.5 percent of gross domestic product in 2018] and together with the approaching presidential elections could also raise uncertainty surrounding foreign direct investment," Fitch said.
The central bank has raised its policy rate by 125 basis points since May and seen its foreign exchange reserves reduced by $13.7 billion to $118.3 billion between January and July – enough for 5.3 months' worth of current external payments, compared with the BBB median of 4.9 months.
"The measures are intended to contain the depreciation of the rupiah and stem capital outflows as a response to contagion from external financing pressures on emerging markets and indicate a strong resolve to ensure stability, even though higher interest rates could come at the expense of GDP growth," Fitch said.
The value of the rupiah has fallen by more than 9 percent against the dollar so far this year, amid better US economy prospects and a simmering trade war between the world's largest economies.
Fitch expects Bank Indonesia to raise its policy rate by a further 25 points this year, 50 points next year and 25 points in 2020.
Bank Indonesia Governor Perry Warjiyo welcomed Fitch's rating.
"Fitch's affirmation on Indonesia's rating at a BBB level with a stable outlook reflects the rating agency's confidence in the Indonesian economy. A strong commitment to maintain stability and strengthen economic resilience amid continuous global uncertainties reflects credible policies made by the authorities," he said in a statement on Monday (03/09).
Indonesia has secured investment grade ratings from the world's "big three" credit rating agencies – Fitch Ratings, Standard & Poor's and Moody's – for the first time since 1997 after Standard & Poor's granted the country long-awaited investment grade status in May last year.