Government debt control sees S&P lift Indonesia’s ratings

May 19, 2017

SINGAPORE – Standard and Poor’s today raised its long-term sovereign credit ratings on the Republic of Indonesia to 'BBB-' from 'BB+', with the outlook stable. It takes Indonesia to investment grade, a move that had been anticipated by markets for some time.

S&P also raised its short-term sovereign credit ratings to 'A-3' from 'B' and its ASEAN regional scale long-term rating to 'axA-' from 'axBBB+'. In addition, the short-term ASEAN regional scale rating was affirmed at 'axA-2'.

The agency said it had raised the ratings to reflect its assessment of reduced risks to Indonesia's fiscal metrics.

“We believe the Government's increased focus on realistic budgetting has reduced the likelihood that a shortfall in future revenue would widen the general Government deficit significantly beyond what we expect now,” it says.

“This also reduces the risk of a rising net general Government debt ratio and debt servicing burden. Instead, we now anticipate that net debt will remain at moderate levels below 30% of GDP.”

S&P said the Indonesian Government's new focus on realistic budgetting has lowered the risks that budget deficits will widen significantly when Government revenue disappoints.

“Generating revenue from Indonesia's tax system has been a structural challenge confronting successive Indonesian governments.

“The ratio of general Government revenue to GDP in Indonesia is the second-lowest of all 67 investment-grade sovereigns, higher only than that of the Emirate of Sharjah.

“This leads to high interest burdens as a share of revenues, despite Indonesia's relatively low Government debt stock.

“Partly due to weaker commodity prices, tax receipts have been well below initial budget projections at least for the past three years. This left the Government having to cut spending toward the later part of the fiscal year
to keep the budget deficit within the legal ceiling of 3% of GDP.

“The 3% cap on the budget deficit written in Indonesia's State Finances Law 17 of 2003 has kept Indonesian Governments focussed on the fiscal balance. Consequently, the general Government deficit in the five years to the end of 2016 averaged a modest 2.2% of GDP, despite a sometimes challenging external environment.

“In 2017, the Government is projecting tax receipts that are lower than projections in the 2016 budget. Although this still represented an increase of more than 15% over realised tax collection a year earlier, the increase is significantly lower than those of earlier years.

“We expect this cautious stance toward budgeting fiscal revenue to persist over the next few years.

“At the same time, we expect better revenue collection to result from the data collected during the just-concluded tax amnesty. We also expect increased control over fiscal spending with subsidy reforms being extended to electricity subsidies from 2017. www.standardandpoors.com (ATI)