International credit rating agency Fitch Ratings maintained Indonesia’s sovereign rating at BBB-/stable outlook (investment grade). Baradita Katoppo, President Director of Indonesia’s Fitch Ratings branch, said that the firm is positive about the country’s financial fundamentals and prudent fiscal policy as the central bank has showed to prefer stability over growth, resulting in slowing credit growth and rising foreign exchange reserves in Southeast Asia’s largest economy. Economic growth is expected to fall to 5.1 percent (y/y) in 2014.
Since 2011 economic growth of Indonesia has slowed amid the weak global economy (causing falling commodity prices) and internal rebalancing. Between June and November 2013, the central bank of Indonesia (Bank Indonesia) gradually raised its key interest rate (BI rate) from 5.75 percent to 7.50 percent in an effort to combat accelerated inflation after the government raised prices for subsidized fuels in June 2013 as well as to limit the wide current account deficit and support the rupiah exchange rate (which began depreciating sharply after the Federal Reserve started to hint about the winding down of the US bond-buying program, leading to capital outflows from emerging economies). In November 2014, Bank Indonesia again raised its BI rate (to 7.75 percent) as the new Joko Widodo-led government hiked subsidized fuel prices (by more than 30 percent). Although this move will make inflation rise to around 8 percent (y/y), Fitch Ratings is optimistic that Bank Indonesia’s prudent monetary policy will push inflation back to its target range of about 4.5 percent (y/y).
Prudent fiscal policy has managed to curb Indonesia’s debt-to-GDP ratio to 26 percent, a very low figure compared to developed countries and emerging markets. However, the wide current account deficit has not improved markedly from 2013 as imports have not declined and exports have not surged as expected after sharp rupiah depreciation. Fitch Ratings forecasts that the current account deficit will only improve slightly to 3.2 percent of GDP in 2014 from 3.3 percent of GDP in 2013.
Fitch Ratings also praised Indonesia’s peaceful government transition in 2014 as well as the new government’s commitment to implement structural reforms (evidenced by the subsidized fuel price hike). The agency stated that Indonesia now needs to focus on enhancing the investment climate through infrastructure development, curb bureaucracy and make sure that minimum wage increases are in line with productivity growth.