Fitch Cuts Indonesia Credit Rating Outlook to Negative

Source: Reuters | Editor: Yudho Winarto

RATING INDONESIA - JAKARTA, March 4 - Fitch Ratings on Wednesday cut Indonesia's credit rating outlook to negative from stable, citing increasing uncertainty and reduced credibility in policymaking, in a move that will add to investor concerns about Southeast Asia's largest economy.

Fitch became the second rating agency to revise down Indonesia's sovereign rating outlook this year, after Moody's last month cut its outlook due to reduced predictability in policymaking.

Both agencies have maintained Indonesia at the second-to-lowest investment grade rating, and a negative outlook means the agency's next rating action could be a downgrade.

The Moody's outlook cut rattled Indonesia's financial markets, and it came soon after index provider MSCI in January had flagged transparency issues in the stock market that triggered a $120 billion rout.

"The outlook revision reflects increasing policy uncertainty and erosion of Indonesia's policy mix consistency and credibility amid growing centralisation of policymaking authority," Fitch said in a statement.

"This could weaken the medium-term fiscal outlook, undermine investor sentiment, and put pressure on external buffers." Fitch's decision was widely reported by local media ahead of the official announcement. The finance and economic ministries and the central bank did not immediately respond to requests for comment.

FISCAL DEFICIT LIMITS

Among the drivers of the outlook downgrade is a potential substantial loosening of the fiscal and monetary policymix, stemming from the government's focus on lifting economic growth to 8% from around 5% now, Fitch said.

The agency also highlighted parliament's plan to review Indonesia's state finance law this year. The law mandates the government keep its annual fiscal deficit under 3% of GDP and public debt at a maximum of 60% of GDP.

"Material relaxation of the longstanding fiscal framework, including the 3% deficit ceiling, would likely weaken policy credibility and the ability to finance higher fiscal deficits without support from the central bank," Fitch said.

A potential revision to these fiscal limits has been a major investor concern, especially as President Prabowo Subianto presses ahead with his costly welfare projects, such as his flagship $20 billion free school meal programme, amid weak revenue collection.

Fitch said it expected this year's budget deficit to be 2.9% of GDP, wider than the government's 2.7% target, while predicting the central bank would cut rates by 50 basis points more this year.

In an interview with Reuters on Tuesday, Finance Minister Purbaya Yudhi Sadewa said the government was ready to adjust expenditure to keep its deficit below the legal limit.

S&P is the only major rating agency that is yet to review Indonesia's credit rating this year. It currently rates Indonesia BBB with a stable outlook.

Factors that could lead to a ratings downgrade include a buildup of economic vulnerabilities, such as from a further weakening of the policy framework, a material increase in public debt, or a sharp decline in foreign exchange reserve buffers, Fitch said.

The rupiah and local financial markets were already under pressure before the outlook downgrade, amid investor fears of a surge in global inflation after oil prices rose due to the war in Iran.