Published: Thursday May 2, 2013 MYT 4:42:00 PM
Updated: Thursday May 2, 2013 MYT 6:46:16 PM

S&P revises Indonesia outlook to stable from positive

KUALA LUMPUR: Standard & Poor's Ratings Services revised its outlook on Indonesia to stable from positive, saying the reform momentum in the world's most populous Muslim nation was stalling while its potential for a rating upgrade had diminished.

The ratings agency on Thursday affirmed its 'BB+' long-term and 'B' short-term sovereign credit ratings and 'axBBB+/axA-2' Asean regional scale rating on Indonesia.

S&P said its transfer and convertibility risk assessment on Indonesia was unchanged at 'BBB-'. It also affirmed its 'BB+' rating on Indonesia's outstanding senior unsecured notes.

"The outlook revision to stable reflects our assessment that the stalling of reform momentum and a weaker external profile have diminished the potential for a rating upgrade over the next 12 months," the ratings agency pointed out.

S&P said the sovereign credit rating on Indonesia reflected the economy's low per capita income, still-developing structural and institutional foundations, a weak policy environment and high and rising external leverage.

It added that these rating constraints were weighed against the country's well-entrenched cautious fiscal management and resultant modest general government debt and interest burden, which made for a favourable debt profile.

Indonesia's per capita gross domestic product (GDP) at a projected US$3,800 in 2013 was relatively low in the rating category. This was despite a decade of moderately strong growth when real per capita GDP rose at an average of 4.7% per year.

"We believe that at this income level Indonesia has a limited ability, relative to wealthier peers, to ensure policy flexibility," said S&P credit analyst Agost Benard.

"The government also has less room to manoeuvre when maintaining creditworthiness would require unpopular polices."

S&P pointed out that slow progress in improving critical infrastructure, along with legal and regulatory uncertainties and bureaucratic obstacles, detracted from Indonesia's growth potential. These factors delayed poverty reduction and economic development.

"Political considerations related to next year's parliamentary and presidential elections appear to increasingly shape policy formulation.

"This weakening policy environment may ultimately have a negative impact on growth prospects and the generally sound economic conditions," it said.

S&P also said Indonesia's external credit fundamentals had weakened somewhat due to rising private sector external leverage and a structural current account deficit, which foreign direct investment inflows did not fully offset.

The ratings agency also highlighted the private sector's external borrowing.

It stressed that unlike Indonesia's general government, which reduced external leverage through prudent fiscal and debt policies, the private sector's external borrowing had doubled over the past six years to 2012.

Hence, the private sector's borrowing was roughly equal the outstanding government external debt stock of about 50% of current account receipts.

"This growth in private sector external borrowing has been mostly propelled by the prevailing low interest rates in foreign currency debt," Benard noted.

"But it also reflects the shallowness of the domestic bond market, where outstanding debt securities amount to just 13.2% of GDP."

However, government fiscal and debt profiles remain key underlying credit strengths, and it expected those to improve further.

S&P forecasts Indonesia's net general government debt to fall to 22% of GDP in 2013, which would be a relatively light burden compared with similarly rated peers. The interest burden of about 7% of general government revenue poses a moderate constraint on discretionary spending.

"The stable outlook reflects our view that the weakened policy environment and external pressures are fairly balanced against the country's strong growth prospects, conservative fiscal policy, and debt trajectories," it said.

S&P said it might raise the ratings based on several factors. This would hinge on whether reforms, such as a subsidy rationalisation, suggested fiscal and external vulnerabilities were sustainably reduced, the sovereign's balance sheet had improved, a decline in external debt burden, or if structural reforms unlocked faster economic growth.

However, it might lower the ratings if renewed fiscal or external pressures were not met with timely and adequate policy responses, or if future policies endangered strong growth prospects or the positive fiscal and debt trajectories.

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