Fitch Ratings retained Indonesia’s BB sovereign rating on Tuesday and said risks from its external financial position were offset by the strength of its fiscal discipline, even as southeast Asia’s largest economy slows.
The outlook is stable and the rating is unchanged since the rating agency raised Indonesia’s rating by a notch last February to BB, two notches below investment grade.
It is one notch above the rating of both its rivals Standard & Poor’s which has a BB-minus rating and Moody’s which has rated the country Ba3.
“Indonesia’s conservative public finances, fiscal restructuring efforts and increased surveillance of fiscal variances to minimise negative fiscal shocks are a sovereign rating strength,” Fitch said in a statement.
The rating agency praised government measures which had helped improve revenues in 2008 to 21% of its GDP, the highest in over two decades.
This had helped nearly wipe out the budget deficit, which at 0.1% was lower than the average of that of countries rated BB –1.1%.
The measures also provided room for Indonesian authorities for a larger fiscal stimulus which would ease some of the pressure on unemployment in an economy expected to slow to about 3.9% in 2009 from 6% in 2008, Fitch said.
Earlier this month, Jakarta announced plans to spend more than 72 trillion rupiah on infrastructure and other projects to boost growth and create jobs.
The last time Indonesia faced a severe economic crisis, in the late 1990s, the country suffered massive job losses and social unrest, leading to the resignation of autocratic president Suharto in 1998.
VULNERABLE EXTERNAL FINANCES
But it said Indonesia’s external finances were sensitive to shifts in investor sentiment.
Fitch said Jakarta’s capital account was vulnerable to portfolio equity or debt outflows as well to a bigger accumulation of external assets by domestic residents and companies.
The rupiah , has stabilised at around 11,000 per dollar in recent weeks after suffering from a sharp sell-off last year as investors pulled out from Indonesia’s stock and bond markets, taking the unit to a decade low. The currency fell 14% in 2008, becoming one of the worst performers in Asia, while Indonesia’s main stock index plunged nearly 51%.
The agency also projected the government debt to GDP ratio would rise to 30.3% in 2009, the highest since 2009. However, this was in line with the average of that for countries with a BB rating.
Indonesia’s external debt and refinancing needs were significant given the present tightness in global financial markets and declining foreign exchange inflows, it said.
Fitch expects Indonesia to report a current account deficit of 0.9% of GDP as weak external demand and lower commodity prices hurt commodity exports which constitute 46% of current external receipts.
“Efforts to raise foreign direct investment and export competitiveness will likely remain challenging against the backdrop of weakness in resource-based activities, as well as poor investor appetite for risk,” the agency warned.