Jakarta: Standard and Poor's (S&P) revised the outlook to Stable from Negative and affirms the Sovereign Credit Rating of the Republic of Indonesia at BBB (Investment Grade) as announced on April 27.
S&P states that the revised rating outlook to stable has been supported by Indonesia's improved external position, gradual progress toward fiscal consolidation, and the continuing improvement in Indonesia's economic recovery for the next two years.
Meanwhile, the affirmation on Indonesia's rating at BBB reflects the economy's solid growth prospect and historically prudent policy.
"The rating affirmation coupled with revised outlook to stable shows strong confidence from international stakeholders on the Indonesia's maintained macroeconomic stability and economic prospects in the medium-term, in the midst of escalating global risk stemmed from geopolitical crisis of Rusia-Ukraina, global economy slow down, and heightened inflation pressures. This is supported by the credibility of the policies and effective coordination of policy mix between Bank Indonesia and the Government. Going forward, Bank Indonesia will continue to closely monitor global and domestic economic and financial developments, formulate and execute the necessary policy measures to ensure macroeconomic and financial system stability and continue to strengthen the synergy with the Government to accelerate the national economic recovery," Governor of Bank Indonesia, Perry Warjiyo, said in a press release on Wednesday.
The Indonesian economy recovery is expected to continue supported by normalization in the economic activities, as the vaccination coverage is becoming broader, thus promoting natural immunity. S&P projects that in 2022 the Indonesian economic growth will accelerate to 5.1% following the 3.7% growth in 2021. However, there are risks, among others, stemmed from the Rusia-Ukraina crisis. The higher commodity prices could help corporate earnings and fiscal revenue, yet poses downside risk to global economic growth, thus lower external demand. The domestic consumption also faced with the risk of higher inflation. Nevertheless, S&P sees that the Job Creation Law passed in 2020 will improve the business climate, thus boosting investment and drive up the economy's potential growth rate.
On the external front, S&P views Indonesia's external settings are benefiting from improved terms of trade on higher commodity prices. Higher market prices for key Indonesian commodity exports such as coal, copper, natural gas, and nickel, along with solid demand dynamics, are driving rapid growth in current account receipts. S&P also viewed policies incentivizing higher value-added processing of mineral ores are also helping to solidify higher export receipts. Indonesia's foreign exchange reserve is expected to be around USD140 billion supported by current account dynamics.
On the fiscal front, S&P views that Indonesia is making headway toward restoring its historically moderate fiscal deficits. The general government achieved a fiscal deficit of about 4.7% of GDP in 2021, considerably lower than the 6.1% shortfall in 2020. S&P projected the deficit to decline further this year, to 4% of GDP, as revenue growth continues to outperform owing to much higher commodity prices and an accelerated normalization of economic activity. S&P also mention that Indonesian government's debt has stabilized following a notable increase in 2020. However, the interest burden is likely to remain somewhat elevated as global interest rates continue to rise over the next one to two years.
S&P highlighted the important role of Bank Indonesia in supporting the country's ability to sustain economic growth and attenuate economic or financial shocks. S&P views that Bank Indonesia participation in purchasing government bonds in the primary market and through private placements has help the government to manage its borrowing costs as the debt stock rose.
S&P had previously affirmed Indonesia's Sovereign Credit Rating at BBB/negative outlook on April 22, 2021.