Standard and Poor's (S&P) has affirmed Indonesia's Sovereign Credit Rating at BBB with a stable outlook, as announced today, July 4, 2023. According to S&P, key factors that support the affirmation are the economy's sound growth prospects, historically prudent policy, and rapid fiscal consolidation. The stable rating outlook reflects S&P expectation that Indonesia will achieve solid economic growth over the next two years which will support fiscal performance and debt stabilization.

In response to the statement, the Governor of Bank Indonesia, Perry Warjiyo, stated that “S&P's rating affirmation reflects strong confidence from international stakeholders on Indonesia's sustained macroeconomic stability and medium-term economic prospects, amid escalating global risk stemmed from geopolitical tensions and the global economic slowdown. This is supported by high policy credibility and the effectiveness of the policy synergy between Bank Indonesia and the Government. 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, and strengthen the synergy with the Government to achieve sustainable economic growth."

S&P views that the decline in inflationary pressures, coupled with increased government spending ahead of the elections, is expected to boost private consumption in the latter half of 2023. These developments could support Indonesia's economic performance amidst challenges stemming from a slowdown in global demand, leading S&P to project a growth rate of 4.8% for Indonesia in 2023. S&P is also confident that ongoing policy reforms, along with favorable demographic structures, will have a positive impact on Indonesia's economy. This is further reinforced by the implementation of the revised Omnibus Law on Job Creation by the Government earlier this year, which is expected to improve the business climate, thereby stimulating investment and potential economic growth.

On the external front, S&P views that the improved external balance sheet of Indonesia will help weather normalizing commodity prices. Policies incentivizing higher value-added processing of nickel have helped solidify higher export proceed. Similar policies for other mineral ores may broaden this trend once the mining industry sets up the required processing capacity. S&P also acknowledged that Indonesia's foreign-exchange reserves have quickly recovered this year, following a decline in the second half of 2022, supported by current account surplus and renewed financial account inflows.

On the fiscal front, S&P mentions that rapid fiscal consolidation has reduced Indonesia's deficit to lower than 3% of GDP a year ahead of schedule. The fiscal deficit for the general government was about 2.4% of GDP in 2022, much lower than the 4.7% shortfall in 2021. S&P expects the deficit to decline further to about 2.3% of GDP in 2023 on higher revenue and continued expenditure management, which will gradually reduce the government's debt stock and relieve pressure on its interest burden. However, Indonesia's narrow revenue base remains a challenge to Indonesia's rating upgrade going forward.

S&P highlighted the important role of Bank Indonesia in supporting the country's ability to sustain economic growth and dampen economic or financial shocks. S&P views that Bank Indonesia's participation in purchasing government bonds has helped the government in managing its borrowing costs as the debt stock rose. S&P also acknowledges that Bank Indonesia has increasingly relied on market-based instruments to implement its monetary policy.

S&P previously upgraded the outlook to Stable and affirmed the Sovereign Credit Rating of the Republic of Indonesia at BBB, as announced on April 27th, 2022.

Jakarta, 5th July 2023

Communication Department

Erwin Haryono

Executive Director