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Fitch Ratings (Fitch) has affirmed Indonesia's Sovereign Credit Rating at BBB with a stable outlook, as announced on November 22, 2021. According to Fitch, key factors that support the affirmation are Indonesia's favorable medium-term growth outlook and low, but rising, 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 other 'BBB' category countries.
In response, 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, for Indonesia's macroeconomic and financial system stability that is maintained as well as medium-term economic prospects which remain strong amid uneven global economic recovery and uncertainty in global financial market. 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."
Following the ease of Covid-19 cases after the high resurgence during June to August 2021, Fitch foresee Indonesia's GDP in 2021 have the potential to grow higher compare to their 3.2% forecast, supported by recovery of mobility and high export commodity prices. Fitch also forecast growth will accelerate to 6.8% in 2022, and remain at around 6% over the next few years, supported by the impact of Omnibus Law on Job Creation implementation on investment.
On the fiscal side, the Harmonization of Tax Regulations (UU HPP) should help the government to meet the deficit target of below 3% of GDP in 2023. In line with that, Fitch forecasts the fiscal deficit will reach 5.4% in 2021 and decline to 4.5% in 2022, slightly narrower than the government targets presented in the government's 2022 budget of 5.8% and 4.9%, respectively, which exclude the positive impact of the tax reform. Nevertheless, long-standing challenges in raising the revenue ratio more significantly remain in Fitch's view, including to expand the tax base and improve compliance. In terms of fiscal financing, Bank Indonesia's initiative to support and finance health and humanitarian care to deal with the impact of Covid-19 pandemic are helping to keep government interest costs down and free up resources for relief measures. In order to maintain a positive response from market participants to this policy, Fitch views that this policy should not be applied for a long time.
From the external side, Fitch views an improving Indonesia's resilience, as can be seen from the increase in foreign exchange reserves and FDI inflows as well as support from swap line cooperation with other central banks. This is also supported by inflation rate which estimated to remain within the target range of 3%±1%, in line with low domestic demand pressure and limited impact of rising international oil prices on domestic fuel prices. Nevertheless, Indonesia remains vulnerable to shifts in investor sentiment, given the high dependence on portfolio inflows and commodity exports.
Fitch previously maintained Indonesia's Sovereign Credit Rating at BBB with a Stable outlook on March 22, 2021.
Jakarta, 23th November 2021
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