Moody's Maintains Indonesia's Rating at Investment Grade, Upgrade Remains Unlikely
Jakarta. Rating agency Moody's Investors Service has maintained Indonesia's sovereign credit rating at Baa3, the lowest notch in an investment-grade rating, with a stable outlook in anticipation of a resilient economy ahead on the back of the government's prudent fiscal management and reforms efforts.
Still, dim prospects of a significant increase in government revenue bar any chance of an upgrade anytime soon, the rating agency said in a memo received by the Jakarta Globe on Thursday (28/1).
"While the government's ambitious infrastructure development agenda and calls for fiscal accommodation to address slowing economic growth could test policymakers' adherence to prevailing fiscal rules, we would not expect to see a substantially lower commitment to containing the government's indebtedness," Moody's said in the statement on Thursday.
Falling global commodity and oil prices has taken a toll on the economy in the last year, with raw commodities making up over half of Indonesia's export goods and oil and gas account for almost 20 percent. This has eroded some of the government's revenue amid its zealous mission towards national infrastructure development.
At the same time, growth dropped to 4.7 percent in the third quarter last year, after touching its weakest pace of growth in nearly six years in the previous quarter, while the rupiah lost some 11 percent against the US dollar throughout 2015.
On the other hand, policymakers have so far been effective in managing risks from the volatile economic conditions and will likely to continue its performance going ahead, Moody's said.
"Since the financial turbulence that initially disrupted a number of emerging markets in 2013, Indonesia's policymakers have engineered a macroeconomic adjustment that has directly addressed investor concerns over external imbalances," Moody's said, referring to the US Federal Reserve's tapering of its quantitative easing, which triggered a massive foreign capital exodus in emerging market like Indonesia.
The stance has shown to bear fruit already in narrowing Indonesia's current account deficit to less than 2 percent of gross domestic production as of September last year, from more than 4 percent in mid-2013, it said.
Dim revenue prospect
The rating agency noted that the country would have a chance for an upgrade if the government figures out a source of sustainable growth for revenue, coupled with an improved current account deficit and inflation as well as progress in untangling infrastructure and regulatory bottlenecks. Deepening the local capital market would also ease reliance on external financing, Moody's said.
The government collected Rp 1,504.5 trillion ($109 billion) from taxation, fees and royalties last year, 15 percent short of its target, according to an unaudited report from Finance Ministry on Wednesday. The country targets to raise Rp 1,822 trillion in revenue this year.
The government has missed its revenue target for most of the last decade — with last year's gap the largest — prompting analysts to point out a lack of government strategy and vigilance in collecting taxes.
"There is an absence of evaluation. What did we plan for 2015 and what are the results? We are done and only finished in numbers," Yustinus Prastowo, executive director at nongovernmental organization Center for Indonesia Taxation Analysis, said on Thursday (28/1).
"It was clear that [the performance] was only optimized in December due to extra efforts, not by design nor good planning. We should mitigate this in 2016, to come up with good planning," Yustinus said.
The government and the House of Representatives is working to pass a tax amnesty bill, which allow allow taxpayers to come clean about overseas wealth and pay a lower tax rate.
The policy is expected to boost revenue collection by $4.4 billion this year while also updating the taxpayers' data so the government would have a more sustainable tax revenue in the future, said Finance Minister Bambang Brodjonegoro.
Downgrade risk
Indonesia could face risk of a downgrade if its sluggish growth persists over an extended period of time, especially if the phenomenon stems from the government's failure to deliver its reforms promises, the rating agency added.
"The series of policy packages that the government has unveiled since September 2015 have focused on streamlining investment bottlenecks and deregulation, while speeding up disbursements for infrastructure development," Moody's said.
"However, Indonesia's track record of implementation temper the prospects for sustained improvements to Indonesia's credit profile."
Moody's statement comes several hours before the government announced its ninth economic package late on Thursday, where it unveiled a strategy targeted to spur the logistics industry and a plan to alleviate pressure in cattle prices through widening the source of cattle imports.
Indonesia intends to revive growth to 5.3 percent by the end of this year, while maintaining inflation at a range between 3 percent and 5 percent.
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