The next Federal Open Market Committee (FOMC) meeting is scheduled for 20-21 March 2018 (a meeting associated with a summary of the Federal Reserve's economic projections as well as a press conference by Chairman Jerome Powell). Market participants will be eager to seek for clues whether the Federal Reserve plans to raise its key interest rate three times or four times (each time by a quarter-point) this year (including one at the March policy meeting).

While concern about accelerated US inflation has ceased for now as US consumer prices in February were not too hot, some argue US inflation is to pick up in the next couple of months as February's unusually soft readings on shelter and medical care (which are the two largest components of the core consumer price index), are unlikely to persist.

Since 25 January 2018 the Indonesian rupiah has been weakening significantly as there was a flight to safety amid rising concern about US inflation, while markets are also preparing for a Fed Funds Rate hike in March. A quarter-point hike at the March meeting will therefore not impact too much as it should already be priced in but if the Federal Reserves indicates that it should become more aggressive with regard to its monetary tightening strategy, then it will trigger new capital outflows from Indonesia. Moreover, this could make Bank Indonesia decide to raise its key rate accordingly.

Deterioration in SOEs Balance Sheets

Xavier Jean, S&P analyst, noted that those state-owned enterprises (SOEs), especially construction and power companies, that are involved in the government-led infrastructure push are plagued by weakening balance sheets as they have been borrowing extensively to fund their part of the infrastructure push. Jean states that the leveraging level of 20 listed and rated SOEs has increased to an average of five times debt-to-EBITDA, soaring from one times in 2011.

As the central government has limited funds at its disposal, Indonesian SOEs were appointed as key agents in the infrastructure development program. But problematically, these SOEs have to borrow heavily to fill the working capital budgets, while projects are often delayed and take many years before starting to generate revenue. Meanwhile, some projects outside the island of Java may not be profitable at all, Jean added.

If this trend continues then the SOEs could be forced to cease all investment within the next five years to control their finances, renegotiate debt or ask for recapitalization from the government.

Kim Eng Tan, Senior Director for Sovereign Ratings at S&P, said SOE debt could also affect ratings of Indonesia's sovereign debt as well as the banking system from which they borrow, although at this point it would not negatively affect government finance.

S&P, known as the more conservative among the world's big credit rating agencies, upgraded Indonesia's sovereign rating to investment grade status (to BBB-/stable) in May 2017, citing an improvement in Indonesia's government budget and reduced risks to the country's fiscal metrics. This upgrade came years after Fitch Ratings and Moody's Investors Service had upgraded Indonesia's rating to investment grade status.