Fitch Ratings (Fitch) has affirmed Indonesia’s Sovereign Credit Rating at BBB (one level higher than the lowest investment grade) with a stable outlook, as announced on September 1, 2023. According to Fitch, key factors supporting this affirmation include a favorable medium-term growth outlook and a low government debt/GDP ratio. Fitch also highlights several challenges, including weak government revenue as well as lagging structural features, such as governance indicators, compared to those from ‘BBB’ category peers. While several external finance metrics, such as current account, are stronger than pre-pandemic levels, but they should normalise within the next few years, assuming further falls in commodity prices.
In their report, Fitch mentioned that Indonesia’s solid economic growth supported by domestic consumption, projecting a 5.0% real GDP growth for 2023. This projection comes despite decelerating net export and escalating downside risk coming from the weakening of China’s economic rebound. Fitch also sees that uncertainty related to the general election in 2024 may not affect investment, and parties’ election spending may also support growth in the next six months. In the medium term, economic activity should receive a boost due to the implementation of reform and ongoing infrastructure development, including the construction of the new capital, Nusantara. Therefore, Fitch projects that the domestic economy will grow by 5.2% in 2024 and 5.0% in 2025.
In the external sector, after experiencing current account surpluses in the last two years, Fitch projects that the current account will post a deficit of 0.3%-1.5% of GDP in 2023-2025 due to declining commodity prices. FDI is expected to gradually increase as down streaming activities gain momentum, thereby boosting manufacturing exports and adding more value to Indonesia’s commodity exports. With regards to inflation, a combination of tightening monetary policy and coordinated efforts to contain rising local food prices by strengthening the National Movement for Food Inflation Control (GNPIP) is expected to bring inflation down to the target 3%+1% by the end of 2023, and to the new target of 2.5%+1% in 2024.
Fitch views that the implementation of prudent fiscal policy has been able to return the fiscal deficit to pre-pandemic levels in 2022, which expected to remain stable below 3% over the next few years. In terms of government revenue, initiatives such as raising the VAT rate may not fully compensate for the negative effects of decreasing commodity prices this year. Nevertheless, in the medium term the government debt is still projected to gradually decline from 38.9% of GDP in 2023 to 38.0% in 2025.
Fitch had previously affirmed Indonesia Sovereign Credit Rating at BBB with a stable outlook on December 14, 2022.