RI’s jump to investment grade rests on fiscal reforms: Fitch

The Jakarta Post, Jakarta | Thu, 03/25/2010 8:56 AM

Indonesia needs to demonstrate monetary and price stability and to continue with its reform program to raise tax revenues as well as to improve overall economic fundamentals in order to achieve an investment grade debt rating, according to Fitch Ratings.

“Making the jump to investment grade will depend on continued strengthening of the policy framework, including demonstrating monetary and price stability,” Andrew Colquhoun, Fitch’s director of Asia Sovereign Ratings said at a credit briefing to investors in Jakarta on Wednesday.

Reforms to raise fiscal revenues and improve economic fundamentals would also support Indonesia’s credit profile, he added.

Fitch upgraded the country to ‘BB+’, a notch below investment grade, in January 2010 primarily in recognition of the improvements to sovereign credit-worthiness arising from fiscal policy discipline and falling debt ratios.

Colquhoun said that prevailing low government tax revenues, however, remained a rating weakness. “But the ratings remain on stable outlook,” he added.

Indonesia’s sovereign creditworthiness is backed by its strong public finance track record relative to its peers in the region.

Indonesia was one of only 15 Fitch-rated sovereigns which registered a year-on-year decline in the general government (GG) debt position as a share of GDP in 2009.

With the current macroeconomic path and fiscal policy framework, Indonesia’s public debt looks set to continue on its downward trend during Fitch’s forecast period.

In general, Colquhoun saw limited potential for ‘contagion’ spreading to Asia in spite of investors’ concerns on some high-debt sovereigns.

“Emerging Asia weathered the global recession well, compared to other regions, partly reflecting improvements in credit fundamentals before the crisis, supporting regional sovereign credit outlooks in general,” he said.

The outlook for Asian companies and financial institutions appears to be brighter too compared to their peers in Western Europe and the US, according to a statement published by the rating agency in Jakarta on Wednesday.

The impact of the global economic downturn was relatively contained in most South East Asian economies, and the performance of most banks in these countries was quite resilient, the agency said.

“Even as asset quality slightly deteriorated and credit costs rose modestly, these were fully absorbed by the banks’ pre-provision earnings leaving their capital positions intact,’ it said.

The statement highlighted that “indeed, several Indonesian banks’ ratings were raised after a similar upgrade to the sovereign rating in January 2010.” But raising fresh equity to fund loan growth and to meet more demanding capital requirements in future will remain challenging, said the agency statement.

The majority of Asia Pacific structured finance ratings are expected to remain stable.