Fitch Affirms Indonesia at 'BBB'; Outlook Stable

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1. 3 /14/2019 [ Press Release ] Fitch Affirms Indonesia at 'BBB'; Outlook Stable Fitch Affirms Indonesia at 'BBB'; Outlook Stable Fitch Ratings-Hong Kong-14 March 2019: Fitch Ratings has affirmed Indonesia's Long-Term ForeignCurrency Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS Indonesia's ratings balance a favourable GDP growth outlook and a small government debt burden with external challenges including a strong dependence on external sources of financing, low government revenue, and several structural indicators that remain below those of rating peers. Indonesia's GDP growth outlook continues to be strong relative to its peers, even though Fitch forecasts a slight deceleration to 5.0% in 2019 from 5.2% in 2018. Fitch expects domestic demand to remain resilient, while exports are likely to remain subdued in an environment of slowing global demand. Consumption and investment continue to underpin growth. Consumption is benefitting from a civil servant salary bonus and a 30% rise in the social assistance bill. Investment growth is supported by large infrastructure projects by state-owned enterprises (SOEs). Indonesia has benefitted from improved global risk appetite towards emerging markets following the US Fed's shift to more dovish monetary policy communication late last year. The country is strongly dependent on foreign portfolio financing, since about 37% of local-currency government debt securities are held abroad, and FDI inflows in 2018 remained at just USD22 billion (2.1% of GDP), despite the strong reform effort of recent years. Dependence on capital inflows has increased due to a widening of the current account deficit over the past year to 3.0% of GDP in 2018, causing the basic balance to turn negative, from a surplus as recently as end-2017. Despite the respite in international financial markets, renewed bouts of market turmoil cannot be ruled out if the US Fed resumes tightening monetary policy later in the year, as Fitch expects. Indonesia's sovereign credit fundamentals should be resilient to substantial exchange rate volatility, provided the fallout does not involve a significant rundown in foreign-currency reserves. Indonesia's low government debt burden compared with its peers would provide a cushion, while large banks are also resilient to significant stress. Capital inflows in recent months have facilitated a partial rebuilding of Bank Indonesia's (BI) foreign-reserve buffers that were eroded in part by significant foreign-exchange interventions to contain rupiah fluctuations in 2018. Foreign reserves fell by USD17 billion between January and September 2018, to a low of USD115 billion, but recovered to USD123 billion in February 2019, equal to 5.5 months of current account payments and slightly above the current peer median of 4.9 months. Fitch expects headline inflation to average 3.4% in 2019, towards the mid-point of BI's inflation target range (3.5% +/-1pp). After cumulative 175bp of central-bank rate increases in 2018, Fitch expects policy rates to remain stable at 6.0% through 2020. This would be in line with BI's aim to strengthen external stability by controlling the current account deficit and to maintain the attractiveness of Indonesian financial assets. The central bank is more likely to ease macro-prudential measures in the meantime, in Fitch's view. Fiscal deficit reduction in a year before elections underscores Indonesia's generally conservative approach https://www.fitchratings.com/site/pr/10066164 1/5
2. 3 /14/2019 [ Press Release ] Fitch Affirms Indonesia at 'BBB'; Outlook Stable to fiscal policy. The fiscal deficit narrowed to 1.8% of GDP in 2018 from 2.3% in 2017, in large part due to strong revenue growth from several quarters of high commodity prices, as well as efforts to improve tax collection. Indonesia's government debt is low at an estimated 29.8% of GDP in 2018. Fitch expects the government debt ratio to remain broadly stable in the next few years and assumes the next government will also adhere to a self-imposed deficit ceiling of 3% of GDP. SOEs have been leveraging up their balance sheets considerably since mid-2017, as a result of their important role in the government's infrastructure programme. The gross combined debt of SOEs rose by almost a third in nominal terms and by 1pp of GDP in the 12 months through September 2018 to 5.5% of GDP. The balance sheets of government-owned PT Pertamina (Persero) (BBB/Stable) and PT Perusahaan Listrik Negara (Persero) (BBB/Stable) have been negatively affected by implicit subsidies on some goods, for which administrative energy prices remained well below global prices. Fitch considers banking-sector related risks to the sovereign as limited, given a strong capital-adequacy ratio, at 22.9% in December 2018, and private credit represents a small proportion of GDP, at just 36%. Foreign-currency loan exposure for Indonesian banks accounts for around 15% of total loans, although direct foreign-currency assets and liabilities are generally well-matched or hedged, and some liabilities relate to funding from banks' foreign parents. Indonesia is less developed on a number of metrics than many peers and its credit profile continues to exhibit some structural weaknesses, notwithstanding improvements from the implementation of reforms in the past few years. There is little indication in Fitch's view that the presidential and parliamentary elections on 17 April 2019 will lead to major changes in the direction of economic policy. Average per capita GDP is low at USD3,903, compared with the 'BBB' range median of USD10,704, and governance remains weak, compared with rating category peers, as illustrated by a low World Bank governance indicator score in the 46th percentile, although this improved from 42nd two years ago ('BBB' median: 59th percentile). SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Indonesia a score equivalent to a rating of 'BBB' on the Long-Term ForeignCurrency IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The main factors that, individually or collectively, could trigger positive rating action are: - Strengthening of external finances, for instance, by an increase in foreign-exchange reserves, diversification away from commodities, and lower dependence on volatile portfolio flows. - Continued improvement of structural indicators, such as governance standards. - An improvement in the government revenue ratio, for example, from better tax compliance and a broader tax base. The main factors that, individually or collectively, could trigger negative rating action are: - A sharp and sustained external shock to investor confidence, leading to a decline in foreign-exchange reserves. - A material increase in the overall public debt burden, for example resulting from relaxation of the budget deficit ceiling. - A weakening of the policy framework that could undermine macroeconomic stability. https://www.fitchratings.com/site/pr/10066164 2/5
3. 3 /14/2019 [ Press Release ] Fitch Affirms Indonesia at 'BBB'; Outlook Stable KEY ASSUMPTIONS - The global economy performs broadly in line with Fitch's Global Economic Outlook. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR affirmed at 'BBB'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'BBB'; Outlook Stable Short-Term Foreign-Currency IDR affirmed at 'F2' Short-Term Local-Currency IDR affirmed at 'F2' Country Ceiling affirmed at 'BBB' Issue ratings on long-term senior unsecured foreign-currency bonds affirmed at 'BBB' Issue ratings on long-term senior unsecured local-currency bonds affirmed at 'BBB' Issue ratings on Perusahaan Penerbit SBSN Indonesia III global certificates (sukuk) affirmed at 'BBB' Contact: Primary Analyst Thomas Rookmaaker Director +852 2263 9891 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Sagarika Chandra Associate Director +852 2263 9921 Committee Chairperson Jan Friederich Senior Director +852 2263 9910 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings Criteria (pub. 19 Jul 2018) Sovereign Rating Criteria (pub. 19 Jul 2018) Sukuk Rating Criteria (pub. 25 Jul 2018) Additional Disclosures Dodd-Frank Rating Information Disclosure Form Solicitation Status Endorsement Policy ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, https://www.fitchratings.com/site/pr/10066164 3/5
4. 3 /14/2019 [ Press Release ] Fitch Affirms Indonesia at 'BBB'; Outlook Stable CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2019 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. 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5. 3 /14/2019 [ Press Release ] Fitch Affirms Indonesia at 'BBB'; Outlook Stable by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO. SOLICITATION STATUS The ratings above were solicited and assigned or maintained at the request of the rated entity/issuer or a related third party. Any exceptions follow below. Endorsement Policy Fitch's approach to ratings endorsement so that ratings produced outside the EU may be used by regulated entities within the EU for regulatory purposes, pursuant to the terms of the EU Regulation with respect to credit rating agencies, can be found on the EU Regulatory Disclosures page. The endorsement status of all International ratings is provided within the entity summary page for each rated entity and in the transaction detail pages for all structured finance transactions on the Fitch website. These disclosures are updated on a daily basis. Fitch Updates Terms of Use & Privacy Policy We have updated our Terms of Use and Privacy Policies which cover all of Fitch Group's websites. Learn more. https://www.fitchratings.com/site/pr/10066164 5/5