No. 22/57/DKom
Fitch Ratings (Fitch) has affirmed Indonesia’s Sovereign Credit Rating
at BBB with a stable outlook, as announced on 10 August 2020.
According to Fitch, key factors that support the affirmation are a
favorable medium-term growth outlook and a low government debt/GDP
ratio. On the other hand, Fitch underscores challenges including a high
dependence on external financing, low government revenue, and lagging
structural features such as governance indicators and GDP per capita
compared with 'BBB' category peers.
In response to the statement, Governor of Bank
Indonesia, Perry Warjiyo stated that, “Fitch’s affirmation on
Indonesia’s rating at BBB/stable outlook reflects the acknowledgement of
Fitch, as one of leading rating agencies in the world, on Indonesia’s
macroeconomic stability and economic prospects in the medium-term amid
the COVID-19 pandemic which has significantly suppressed the global
economy. This supported by the credibility of the policies and strong
coordination of policy mix between Bank Indonesia and the Government.
Going forward, Bank Indonesia will continue to closely monitor global
and domestic economic developments, take the necessary policy measures
to ensure macroeconomic and financial system stability and continue the
synergy with the Government to accelerate the national economic
recovery.”
Furthermore, Governor of Bank Indonesia stated that,
“Indonesia has taken prudent and measured fiscal, monetary and financial
policy to address the impact of the spread of Covid-19 on macroeconomic
and financial system stability. In this regard, various indicators show
that macroeconomic stability is well maintained so as to support
national economic resilience. In July 2020, inflation was recorded at
1.54% (year-on-year) and projected within the target corridor of 3.0%±1%
in 2020. Current account deficit is projected to remain low and foreign
portfolio investment is recorded net inflows again. Along with these
developments, the Rupiah exchange rate appreciated by 14.42% (point to
point) in the second quarter of 2020. Foreign reserves at the end of
July 2020 increased to USD135.1 billion, equivalent to 8.6 months of
imports and servicing of short-term government’s external debt.”
In its assessment, Fitch projects that economic
activity in Indonesia to contract in 2020, largely attributable to the
impact of the coronavirus. The contraction is exacerbated by the effect
of social distancing measures on consumption and investment, a temporary
deterioration in Indonesia’s terms of trade and the sudden stop in
foreign tourism inflows. The strong, broad-based impact of the pandemic
on economic activity was illustrated by the 5.3% (year-on-year)
contraction in 2Q20. However, Fitch forecasts a rebound of 6.6% in 2021.
Economic growth momentum is predicted to continue in 2022, at 5.5%,
supported in part by the government’s renewed focus on infrastructure
development.
Furthermore, Fitch states that the government has
responded swiftly to the crisis with a broad range of relief measures to
support households and companies, including small and medium-sized
enterprises. Total COVID-19 related government support amounts to IDR695
trillion (4.4% of GDP) and includes direct cash transfers, provision of
basic foods, guarantees and tax incentives. The authorities have also
taken some exceptional, temporary measures, which include a three-year
suspension of a self-imposed deficit ceiling of 3% of GDP and policy on
direct central bank financing of the deficit.
In Fitch’s view, prudent fiscal policy in past years
has provided headroom for the relief measures. Referring to the fiscal
deficits over the past decade which were well below the ceiling of 3% of
GDP, Fitch believes that the government will fulfill its commitment to
bring the fiscal deficit back below 3% of GDP deficit ceiling by 2023.
Higher government spending and lower revenue due to the slowdown is
expected to increase fiscal deficit to around 6.0% in 2020 from 2.2% in
2019. The fiscal deficit is expected to narrow to 5.0% in 2021 and 3.5%
in 2022, as most of the pandemic-related expenditures should be
temporary.
Regarding the “burden sharing” scheme agreement
between Bank Indonesia and the government to finance the government
expenditure related to Covid-19 Pandemic, Fitch considers the scheme
will help reduce the government’s direct interest costs. In Fitch’s
view, the scheme is unlikely to generate inflationary pressures in this
year’s environment of demand compression. Implementation of disciplined
monetary policy in Indonesia in the past few years raises Fitch’s
confidence that the “burden sharing” scheme will be one-off (temporary).
Fitch observes that Bank Indonesia has provided
liquidity to the banking system in response to the pandemic and cut its
policy rate by a total of 100 bps since February 2020 to 4.0%. In
addition to ample liquidity conditions, Fitch considers banking sector's
capital remains strong as reflected by its capital adequacy ratio at
22.1% in May 2020.
In particular, Fitch also take notes on the
government continuous agenda to press ahead with its structural reform
efforts. In Fitch’s view, the reforms have the potential to lift
economic growth and foreign direct investment over the medium term.
Fitch had previously affirmed Indonesia Sovereign Credit Rating at BBB/stable outlook on 24 January 2020.
Head of Communication Department
Onny Widjanarko
Executive Director
Information on Bank Indonesia
Tel. 021-131, email: bicara@bi.go.id
