Key Factors Leading to Positive Assessment

External pressures heightened in emerging markets, particularly in those countries that are plagued by a widening current account deficit such as Indonesia, after the Federal Reserve started to speculate about an end to its USD $85 billion per month stimulus program (quantitative easing). Amid large capital outflows, Indonesia's central bank allowed the Indonesian rupiah exchange rate to depreciate instead of using its foreign exchange reserves. Another measure that was judged positively by Fitch Ratings constitutes the central bank's decision to raise the country's benchmark interest rate (BI rate) by 175 bps from 5.75 percent to 7.50 percent in order to foster financial stability amid higher inflation, a depreciating currency and a widening trade deficit. Lastly, for both sovereign and financial institutions, market access remained intact.

Despite the fact that the economy of Indonesia has been decelerating (5.62 percent GDP growth in the third quarter of 2013), growth has been relatively higher and less volatile compared to other countries rated in the BBB range (which involves BBB+, BBB and BBB-). Growth in 2012 was recorded at 6.2 percent. Fitch Ratings expects GDP growth to slow to 5.5 percent in 2013 and 5.3 percent in 2014. The slowing economy is mainly caused by external influences (global uncertainty and low commodity prices) as well as reduced domestic consumer confidence. Still, GDP growth remains at a relatively high level, thus supporting the country's debt dynamics.

Fitch Ratings expects Indonesia's fiscal deficit to widen to 2.5 percent of GDP in 2013 (from 1.9 percent in 2012). However, this is still within the scope stipulated by the government. Indonesia's law sets a maximum of 3 percent of GDP to its fiscal deficit. Public debt, currently around 25 percent of GDP, is low by international standards. The average public debt ratio of countries in the BBB range is 39 percent.

Although Fitch Ratings points to relatively high risks due to Indonesia's strong credit growth, there are no signs yet that this will jeopardize the financial system. Based on various stress tests, Indonesia's major banks are strong enough to withstand a deterioration of domestic conditions as well as increased pressures on the rupiah exchange rate.