Dagong Maintains the Sovereign Credit Ratings of Indonesia at BBB- with a Stable Outlook
Dagong Global Credit Rating Co., Ltd.
July 10, 2018
Dagong Global Credit Rating Co., Ltd. (hereafter referred to as “Dagong”) has decided today to maintain the local and foreign currency sovereign credit ratings of the Republic of Indonesia (hereafter referred to as “Indonesia”) at BBB-, each with a stable outlook. Indonesia’s repayment environment is stable while the economy maintains rapid growth. Proper financing channels, relatively low financing needs and a reasonable debt maturity structure all help ease repayment pressure from modest increases in debt. Government solvency in local and foreign currency remains stern.
The key reasons for maintaining the sovereign credit ratings of Indonesia are below:
First, Indonesia’s political environment is broadly stable, yet the country should stay vigilant against external risks of the credit environment. With considerable governing experience and relatively high public support, the current president Joko “Jokowi” Widodo is likely to win the presidential election in 2019, preserving the continuity of policy. Over recent years, Jokowi’s governing coalition has strengthened, yet its structure grows looser. Partisan divisions over immigration policy, struggles against corruption, as well as personnel appointment and removal, among other issues, might somewhat impair administrative efficiency. In terms of the credit environment, given the rigorous regulation, the soundness of the financial system has improved. However, banks’ non-performing loans concentrate in the mining industry and foreign trade among other industries, all of which are susceptible to external shocks, while the extremely open capital market is subject to hot money. As a result, as global liquidity tightens, it is expected that Indonesia will encounter growing pressure from capital outflow.
Second, in the short term the economy shows steady growth, while Indonesia has comparatively great growth potential in the medium and long term. In 2017, robust consumption demand and increases in external demand caused Indonesia to register a growth rate of 5.1%. In the near term, the ever-growing middle class and government policies to revive the economy will result in steady growth in consumption and investment while the continued improvement in external demand and rising oil prices bolster net exports. It is projected that in 2018 and 2019, Indonesia’s actual growth rate will rise to 5.3% and 5.5%, respectively. In the medium and long term, a population bonus and the ever-improving infrastructure will help the country to continue unlocking its growth potential. Hence, it is expected that Indonesia will grow at a rate of 5.5% over this period.
Third, Indonesia’ repayment sources are comparatively secure. In the near term, although the government continues to adopt policies to rejuvenate the economy and thereby increases development spending, yet a higher economic growth rate and the government’s enhanced tax collection will help generate additional fiscal revenues. It is projected that in 2018 and 2019, the Indonesian general government fiscal deficit will drop slightly to 2.7% and 2.6%, while the ratio of financing needs to GDP over the same period stands at 4.8% and 4.5% — both at relatively low levels. Thus, government repayment sources are secure.
Fourth, government debt grows from a low level and government solvency remains stable. Indonesia’s expansionary fiscal policies will slightly push up the government debt burden. It is projected that in 2018 and 2019, the Indonesian general government’s debt burden will respectively rise to 28.3% and 28.7% — still below the 30.0% level. Meanwhile, a maturity structure featuring long-term debt reduces pressure from repaying short-term debt facing the government, thus local-currency solvency is stable. As of the end of 2017, Indonesia’s total external debt increased by 0.3 percentage point to 35.1% compared with the previous year, and meanwhile 13.9% of the aforementioned debt was short-term external debt, which the foreign exchange reserves can cover as much as 255.7%. A weakened capacity to earn foreign exchange through exports and the modest depreciation of the Indonesian rupiah bring the foreign-currency solvency under pressure. Nonetheless, Indonesia’s relatively low total external debt, a reasonable debt structure and some buffers can all assure stable government solvency in foreign currency.
In the short term, the tightening global liquidity might lead to a growing capital outflow while the Indonesian financial system and the stability of its international balance of payment both face underlying risks. However, Indonesia’s relatively strict financial regulation can guard against external risks and the country’s ongoing economic reform helps exploit growth potential, thus the fiscal deficit continues to narrow. Although the government debt burden has risen a little, it is several factors including relatively small debt loads, a reasonable debt structure, and some reserve buffers which can help guarantee solvency. Therefore, Dagong assigns a stable local and foreign currency sovereign credit rating outlook for Indonesia for the following one to two years.