Jakarta. Fitch Ratings, one of the world's "Big Three" credit rating agencies, has upgraded Indonesia's long-term sovereign debt rating to "BBB with a stable outlook," a notch above investment grade, from BBB- previously to reflect the country's improving resilience against probable global financial shocks.
This was the second time in the last six years Fitch upgraded its rating for the largest economy in Southeast Asia, which has now secured investment grade ratings from all three major debt-rating agencies — the other two being Standard & Poor's and Moody's.
"In Fitch's view, Indonesia's external finances have become more resilient to potential external vulnerabilities as a result of the consistent focus of the government's policy framework on macroeconomic stability and the improvement in external buffers, including foreign-exchange reserves," Fitch said in a statement on Thursday (21/12).
Thanks to a more flexible exchange rate policy since mid-2013, Indonesia sat on a $126 billion foreign exchange reserve buffers by the end of November this year, enough for a seven-month worth of current account payments. This favorably compares to an average of six months among peer countries with similar BBB rating, Fitch said.
Bank Indonesia, the country's central bank, has been implementing a disciplined monetary policy while the government remains prudent in budget management, the agency said.
"Macro-prudential measures have helped curb a sharp rise in corporate external debt, while financial deepening has coincided with improved market stability. The focus on macro stability is also evident in credible budget assumptions in the previous few years," Fitch said.
Government debt burden remains low at 28.5 percent of GDP in 2017 — compared to the BBB median of 41.1 percent — thanks to "self-imposed budget-deficit ceiling of 3 percent of GDP, which has helped maintain investor confidence in Indonesia during times of market turbulence."
Fitch said main external challenges include US Federal Reserve's policy normalization which could incite capital outlflow from emerging markets like Indonesia.
The country's high dependence on coal, palm oil, minerals and oil and gas exports could pose a risk if the current recovery in global commodity demand stalled.
Indonesia's net and gross foreign debts also remain high — at 166 percent of current account receipts, compared to an average of 130 percent among countries with BBB rating.
"Domestically, the possibility that political noise becomes a distraction from economic policy-making in the run-up to the 2018 local elections and 2019 presidential election represents a risk to the strong reform drive and could undermine domestic and foreign market sentiment, although such an outcome is not Fitch's base case," the agency said.
Indonesia has improved its position in the World Bank's Ease of Doing Business ranking to 72nd out of 190 countries, rising 37 places in two years.
"The reforms also seem to be contributing to stronger external finances, with foreign direct investment (FDI) picking up in recent quarters to such an extent that Fitch expects net FDI to cover the current account deficit over the next few years," the agency said.
Fitch now expects Indonesia's economic growth to accelerate to 5.4 percent in 2018 and 5.5 percent in 2019, rising from 5.1 percent this year, driven by pick-ups in global trade and investment, Fitch said.
Fitch was the first to upgrade Indonesia's sovereign debt rating to investment grade in 2011, followed by Moody's in 2012. Standard & Poor's granted a long-awaited investment grade status to Indonesia in May, granting the country the coveted status from all three major credit rating agencies for the first time since 1997.