Fitch affirms RI sovereign ratings
Fitch affirms RI sovereign ratings
The Jakarta Post, Jakarta
In its first assessment of Indonesia since the Bali attack in October, London and New York-based Fitch Ratings has affirmed its long-term foreign and local currency sovereign rating at "B", which implies a stable outlook.
In a media release on Monday, the agency argued that the broad thrust of restructuring and fiscal consolidation, which had underpinned Fitch's upgrade of Indonesia's ratings earlier this year, remained intact and that only a very deep and prolonged loss of confidence or renewed political instability would put public debt sustainability at risk.
"Early indications suggest that the fallout from the Bali attack should be containable.
"Nonetheless, the incident seems certain to exact some cost in terms of delayed recovery from the Asia crisis, reduced investor confidence and a weaker balance of payments," Fitch said.
Affirmation of the ratings and the outlook recognized the government's prompt response in confronting terrorism domestically since the Bali bombings and forcefully restating its commitment to macroeconomic stabilization and reform, most notably in a recent supplementary letter of intent to the IMF, it said.
President Megawati Soekarnoputri's position still looked secure and her genuine popularity, coupled with continuing internal divisions among her opponents, suggested the 2004 presidential election was hers for the taking, it said.
Arguably, the terrorist incident has strengthened her hand domestically, but Fitch hesitated to discount the significant risks that may remain ahead of 2004, as she continued to steer a narrow path between pro-Islamic and pro-Western factions.
Despite encouraging external trade data for October, Fitch said it was too early to assume that the economy would simply shrug off the Bali attack, and growth in 2002 might do no better than match the 3.3 percent of 2001.
It said recently revised official macroeconomic forecasts for 2003 represented a more sober assessment of the short-term outlook and formed the backdrop to a slight easing of fiscal retrenchment in 2003 and a higher budget deficit of 1.8 percent of GDP, up from an originally budgeted 1.3 percent, aimed chiefly at bringing relief to Bali.
"Yet the authorities could hardly be accused of abandoning fiscal consolidation: better-than-expected budget outcomes for 2001 and 2002 to date have dispelled fears of fiscal indiscipline and allayed concerns that public debt could be on an explosive path," Fitch said.
Having peaked at close to 90 percent of GDP in 2000 to 2001, Fitch expected central government debt per GDP to fall to 73 percent by the end of 2002 and 68 percent by the end of 2003.
Fitch believed the main impact of the Bali attack would be felt on the balance of payments. For 2003, the agency was assuming a 30 percent drop in tourism receipts, roughly in line with Indonesia's experience following the riots of May 1998, reducing the current account surplus to under US$5 billion, from more than $6 billion in 2002. The impact on foreign direct investment promises to be less, primarily because it is already running well below precrisis levels.
"Even so, signs of a nascent recovery in investor sentiment earlier this year could now be at risk," it said.
While the Bali bombing could knock the economy sideways, Fitch did not expect it to go into a tailspin. Recent improvements in policy fundamentals should put a floor under the currency, reinforced by a resilient current account surplus and US$30 billion of international reserves.
Moreover, it said, very little of the nation's external financing gap was met from market sources, insulating it from any broader deterioration in emerging market investor sentiment.
Aid donors have already indicated their support for Indonesia post-Bali and it seems highly likely that Indonesia could secure additional IMF support if necessary, according to Fitch.
"Further rating actions will hang upon evidence of sustained economic recovery and restructuring, continued budgetary discipline and lasting improvements in the public and external debt ratios," it said.