From the statement that was released by Fitch Ratings on Thursday (20/07) we conclude that the rating agency remains (cautiously) optimistic about the Indonesian economy, its fiscal stability and sees improved resilience of Indonesia's external finances for the following reasons:

  • Indonesia has a low government debt burden due to prudent management (for example the self-imposed budget-deficit ceiling of 3 percent of GDP). Fitch Ratings sees low general government debt burden of 28.2 percent of GDP in 2017 which is favorable when compared to the 'BBB' median of 41.2 percent of GDP and helps anchor Indonesia's investment grade rating
  • Indonesia has a favorable economic growth outlook. Fitch Ratings expects real GDP growth to expand by 5.2 percent (y/y) in 2017, followed by 5.6 percent (y/y) in 2018. This is a favorable outlook when compared to 'BBB' category peers
  • Indonesia shows limited sovereign exposure to banking-sector risks with weak - but strengthening - external finances compared to 'BBB' category peers. Private sector credit represents only 36.9 percent of GDP and the banking system's health is relatively strong reflected by a strong capital adequacy ratio at 22.6 percent in April 2017
  • Indonesian authorities continue to strengthen their macroeconomic policy record with a focus on macro economic stability and sustainable growth
  • Indonesia's foreign exchange reserves touched a record high of USD $125 billion in May 2017 supported by Bank Indonesia's monetary and exchange-rate policies
  • A slowdown is detected in the swift rise of Indonesia's corporate external debt, in part due to Bank Indonesia's external borrowing requirements that have been implemented since 2015
  • Fitch Ratings detects credible GDP growth assumptions in the revised 2017 state budget (approved by parliament), a marked contrast from the overly ambitious annual growth targets that were seen in budgets in earlier years
  • The Joko Widodo administration has been on a structural reform drive since September 2015. Positive examples are the tackling of red tape and enhancing certainty for investors with regard to local minimum wage increases

However, Fitch Ratings also sees several reasons that require some caution:

  • Indonesia's exhibits several structural weaknesses, while governance standards lag behind when compared to 'BBB' category peers. For example, Indonesia's average per capita GDP remains low at USD $3,823 compared to the 'BBB' range median of USD $10,459, while governance continues to be weak, as illustrated by a low score in the World Bank's governance indicator (41st percentile versus the 'BBB' median of 58th percentile) and Transparency International's corruption index (90th out of 176 countries)
  • The business environment of Indonesia remains difficult, albeit showing an improvement
  • Indonesia remains dependent on commodities for its export performance
  • Indonesia remains dependent on portfolio inflows to finance a persistent, but manageable, current-account deficit that Fitch Ratings sees at a roughly stable 2 percent of GDP through 2019
  • It is unlikely to see Indonesia's GDP growth exceed the 6 percent (y/y) level soon (the level that was seen prior to the collapse of the commodity boom)
  • The government's reform agenda could lose momentum if political and religious frictions within society become a distraction from economic policy-making as the presidential elections of 2019 approach. The Jakarta gubernatorial elections held earlier this year illustrate how such issues can dominate the electoral discourse
  • Measures perceived as favoring domestic businesses (protectionism) could deter foreign investment in Indonesia
  • Although Indonesia's banking system is regarded as relatively strong, risks that built up in the previous credit cycle imply a more challenging operating environment. This has led to deferral of private-sector capital expenditure and has increased gross non-performing loans to 3.1 percent of total assets in April 2017, from a low of 1.8 percent at end-2013

In response to the latest Fitch Ratings statement, Bank Indonesia Governor Agus Martowardojo stated that "Fitch Rating's affirmation to Indonesia's rating at BBB-/positive outlook is a supporting factor for Indonesia to maintain investors' and stakeholders' confidence. This forms good momentum for Indonesia to persistently maintain balanced economic growth amid the ongoing global uncertainty. Bank Indonesia will continue to support and contribute to the national reform agenda to attain sustainable and inclusive economic growth".

Credit Rating Indonesia:

     Standard & Poor's        Fitch Ratings            Moody's
Rating Outlook Rating Outlook Rating Outlook
Indonesia BBB- Stable BBB- Positive Baa3 Positive

Various sources