Debt Ratings

Jan 30th, 2007, in Business & Economy, by

Fitch Ratings has raised Indonesia’s debt rating outlook from stable to positive.

Released on the 29th of January 2007 Fitch Ratings revised its outlook on the foreign and local currency Issuer Default ratings (“IDR’s”) of the Republic of Indonesia to Positive from Stable, while affirming both ratings at ‘BB-‘ (BB minus). At the same time, Fitch Ratings also affirmed Indonesia’s Short-term IDR at “B” and the Country Ceiling at “BB”.

Ai Ling Ngiam, Director in Fitch’s Sovereign Ratings team in Singapore, said:

The revision to the Outlook on Indonesia’s sovereign ratings reflects the authorities’ commitment to maintaining economic stability and fiscal discipline, as well as the government’s stronger top-down policy intent to implement a structural reform agenda aimed at improving the investment climate.

The government’s efforts to tackle key investor concerns on corruption, bureaucratic and regulatory hindrances particularly in the areas of taxation and customs may slowly be paying off. Fitch says that a culture of fear of openly engaging in corruption has emerged amid anti-corruption investigations leading to several high profile prosecutions, asset recoveries and rising complaints via the whistle-blower programme.

Meanwhile the government’s electronic open tender procurement system has improved transparency. Indonesia has also improved its ranking in the World Economic Forum’s Global Competitiveness Index, moving up to 50th in 2006 from 69th in 2005.

Public finances and improving surveillance of broader fiscal risks are Indonesia’s fundamental rating strengths. Fitch forecasts the fiscal deficit will stay manageable at 1.1% of GDP this year, while the government debt-to-GDP ratio should drop to around 38% this year, levels last seen only in 1997 and better than the 41% median for the ‘BB’ rating category.

Nonetheless, the debt-to-revenue ratio of 212% in 2006 is less favourable than the ‘BB’ median of 162% and further tax efforts are needed to increase revenue. Domestic debt re-profiling efforts have successfully reduced the bunching risks of domestic debt repayments in 2007-2009 by switching these bonds into long-dated bonds maturing in 2010 and 2025.

On the external front, a strong build-up of foreign exchange reserves thanks to commodity price increases, larger-than-expected import compression by manufacturers and robust portfolio inflows has provided a more comfortable cushion to deal with systemic shocks. Indonesia’s gross financing requirement including short-term debt is expected to drop to around 66% of official reserves, in line with the ‘BB’ median.

Nonetheless, Indonesia’s external balance sheet risks remain, as an up-tick in emerging market risk aversion could lead to a disruptive outflow of portfolio equity or debt investment, while a larger resident accumulation of private external assets may also weigh on the balance of payments. Furthermore, on the current account front, a higher consumer and manufacturers’ import bill attributable to the recovery in real GDP growth to approximately 5.9% this year from 5.6% in 2006 pose dollar demand pressures.

Trade facilitation through the creation of Special Economic Zones, the push for an Economic Partnership Agreement with top export destination Japan and the implementation of National Single Window scheme for traders by 2008 is vital to raise Indonesia’s current external receipts (“CXR”).

Indonesia’s gross external debt, external debt service and interest service ratios are weak compared to ‘BB’ peer medians. Looking ahead, Fitch says the resilience of the external position will require accelerated efforts to build sustainable capital inflows in the form of foreign direct investment (“FDI”), as a preferred alternative to possibly volatile portfolio flows. Indonesia’s export competitiveness will also need to be addressed in the near term with greater urgency to improve Indonesia’s credit risk profile.


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