S&P Retains Indonesia's Credit Ratings at BBB and Short-Term A-2 Levels

JAKARTA - S&P Global Ratings (S&P) has reaffirmed Indonesia's long-term sovereign credit rating at the BBB level with an A-2 short-term rating.

In its report, S&P explained that the stable outlook reflects the belief that the weakening of Indonesia's fiscal and external conditions is only temporary.

The institution also estimates that conditions will improve as commodity prices rise and government policies become more consistent.

According to S&P, the pressure on Indonesia's fiscal and external positions is influenced by high energy prices, still high global interest rates, a weakening rupiah exchange rate, increased policy uncertainty, and increased debt.

However, these factors are still considered to be balanced through an increase in commodity prices and government spending efficiency.

S&P also assessed the government's efforts to strengthen the governance of the natural resources and mineral sector have the potential to increase state revenues and export values, especially if policy implementation is effective and consistent.

"We reaffirm Indonesia's sovereign credit rating for the long term 'BBB' and short term 'A-2'," quoted from a written statement, Monday, July 13.

The rating agency estimates that government revenue will continue to improve throughout this year, supported by an increase in export revenue due to improved commodity prices.

In addition, policies aimed at increasing revenue from the resource sector are seen to have a positive impact in the long term, especially if policy changes become more predictable and implemented properly.

"The stable outlook also reflects our expectation that the government continues to view the annual deficit limit of 3 percent as an important policy anchor," he said.

However, S&P reminded that Indonesia's debt rating could be downgraded if a number of indicators worsen, including if the government's net debt increases consistently by more than 3 percent of GDP each year or if government debt interest payments continue to be above 15 percent of total state revenues.

The risk of a downgrade may also arise if export receipts weaken structurally so that gross external financing needs continue to exceed the combined receipts of current transactions and available foreign exchange reserves.

On the other hand, S&P said that the possibility of a rating increase remains open if Indonesia's fiscal and external conditions show sustainable improvement, one of the indicators is a fiscal deficit that narrows to around 1 percent of GDP, supported by an increase in state revenues, a decrease in financing costs, and exchange rate stability.

In addition, improvements in the external sector that are able to reduce net foreign debt to below 50 percent of current transaction receipts, as well as reducing the gross external financing requirement below 50 percent of total current transaction receipts and foreign exchange reserves, are also factors that can encourage an increase in the rating.

Overall, S&P assesses Indonesia's economic growth prospects are still strong with the support of relatively prudent macroeconomic policies as well as lower government and foreign debt levels compared to many equivalent countries.

However, the institution also noted that there were still a number of challenges, such as a relatively moderate per capita GDP, an export base and fiscal revenue that were not yet extensive, and the domestic financial sector which was considered not as deep and diversified as the comparison countries.

The factors are still obstacles to improving the quality of Indonesia's credit profile.