S&P Maintains Indonesia's Credit Rating at BBB with Stable Outlook

S&P Global Ratings has maintained Indonesia’s sovereign credit rating at BBB for long-term debt and A-2 for short-term debt with a stable outlook. The stable outlook reflects our expectation that government revenues will continue to recover this year and export earnings will rise again as commodity prices increase, S&P stated in its official report. Policies aimed at boosting government revenues and export earnings from the natural resources sector are also expected to drive revenue increases in the medium term, particularly if policy changes become more predictable and are well executed. The stable outlook also reflects S&P’s expectation that the Indonesian government continues to view the annual budget deficit ceiling of 3 percent of gross domestic product as an important policy anchor. According to S&P, Indonesia’s rating reflects strong economic growth prospects, generally prudent macroeconomic policies, and relatively low net external debt and government debt burdens compared with similarly rated peers. However, these strengths are balanced by a still relatively low GDP per capita, a narrow export and fiscal revenue base, and a domestic financial sector that is not yet as deep or diverse as those of its peers. These conditions have increased the government’s debt servicing burden. In its report, S&P also outlined several scenarios that could trigger a downside or upside to Indonesia’s rating. S&P could lower the rating if net general government debt increases consistently by more than 3 percent of GDP per year. The rating could also be lowered if general government interest payments remain above 15 percent of total government revenues on a sustained basis. Furthermore, a downgrade could occur if export earnings slow structurally, causing gross external financing needs to consistently exceed the sum of current account receipts and usable reserves. Conversely, S&P stated that Indonesia’s rating could be raised if fiscal and external indicators strengthen structurally. This could happen if the fiscal deficit narrows to close to 1 percent of GDP on a sustained basis, accompanied by a significant increase in government revenues, lower funding costs, and a stable exchange rate. At the same time, external indicators would also need to improve significantly, with net external debt falling to below 50 percent of current account receipts and gross external financing needs dropping to below 50 percent of the sum of current account receipts and usable reserves. Overall, S&P expects the Indonesian economy to continue growing at around 5 percent per year over the next two to three years despite rising fuel prices. S&P assesses that fiscal spending policies and downstreaming will support economic growth. Furthermore, the government’s policies to increase control over the mineral and natural resources sector could potentially boost government revenue and export earnings growth. However, S&P cautioned that rapid policy changes and implementation uncertainty could affect investor confidence and put pressure on the exchange rate and financial markets.