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Fitch Ratings (Fitch) has affirmed Indonesia's Sovereign Credit Rating at BBB (investment grade) with a stable outlook, as announced today, December 14, 2022. According to Fitch, key factors that support the affirmation are a favorable medium-term growth outlook and a low government debt/GDP ratio. Fitch underscores several challenges, including weak government revenue as well as lagging structural features, such as governance indicators, compared to those from 'BBB' category peers.
In response to the statement, the Governor of Bank Indonesia, Perry Warjiyo, stated that “Fitch's affirmation on Indonesia's rating at BBB/stable outlook shows strong confidence from international stakeholders on Indonesia's maintained macroeconomic stability and medium-term economic prospects. This is supported by high policy credibility and the effectiveness of the policy mix orchestrated by the Government and Bank Indonesia, amidst elevated global economic uncertainty and the emerging risk of stagflation due to the increase in the global policy rate. Going forward, Bank Indonesia will continue to closely monitor global and domestic economic and financial developments, formulate and execute the necessary policy measures to ensure macroeconomic and financial stability, including adjusting policy stances, when necessary, as well as continuing to strengthen the synergy with the Government to accelerate the national economic recovery."
In their reports, Fitch expects that Indonesia's economy will continue to recover and grow by 5,2% in 2022. Faced with weakened external demand, higher interest rates, and lower commodity prices, GDP growth in 2023 is projected to slow down to 4.8%. However, Fitch views that there is some upside from the reopening of the tourism sector. Over the medium term, the domestic economy will grow by 5.6% in 2024, boosted by the implementation of the Omnibus Law on Job Creation and the continuation of infrastructure spending, including the construction of the new capital in East Kalimantan.
On the external sector, after experiencing current account surpluses in the last two years (2021-2022), in 2023, the current account is projected to post a deficit of 0.8% of GDP. FDI will gradually pick up, implying higher manufacturing exports and down-streaming activities. With regard to inflation, tightening monetary policy is expected to bring down inflation to the target 3%+1% at the end of 2023.
Fitch views that the government will reinstate the budget ceiling of below 3% of GDP. The fiscal deficit continues to narrow from 4.6% in 2021 to 3.4% in 2022 and 2.9% in 2023. This would make Indonesia one of the first governments in the Asia-Pacific to return to pre-pandemic fiscal deficit levels. Several measures to increase government revenue including a rise in the VAT rate in April 2022 have supported the recovery in the budget performance. As a result, the government debt will gradually decline from 41.1% in 2023. This level is well below the 'BBB' category peers of 55.6%.
Fitch had previously affirmed Indonesia Sovereign Credit Rating at BBB with a stable outlook on June 28, 2022.
Jakarta, 14 December 2022
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