Investors Upbeat on Indonesia but Point to Political Risk, Says Fitch

Most attendees at Fitch Ratings' Indonesia Credit Briefing held in Jakarta were optimistic about Indonesia's prospects and felt that now was the time to increase exposure to the country.

Domestic political turbulence was seen as the biggest risk to this upbeat outlook in 2017, with almost half of the 220 investors, analysts and members of the business community who attended placing it ahead of US interest rate rises and trade protectionism.

Over 70% of attendees surveyed on 23 March said that now is the time to increase exposure to Indonesia, up from around 50% last year. They were particularly optimistic about infrastructure investment.

Almost 90% of attendees expected capital spending to increase significantly in 2017 and 2018, while construction was the sector expected to benefit the most from government policies.

The recent increase in debt issuance by state-owned enterprises to finance infrastructure projects supports these views.

Improving macroeconomic stability

Indonesia's improving track record of macroeconomic stability was also apparent in the survey.

The authorities no longer appear to be chasing overly ambitious growth targets, and are instead putting more focus on containing inflation and external imbalances.

Accordingly, only 28% of those surveyed were expecting Bank Indonesia (BI) to cut rates this year, even though the economy is still performing slightly below potential.

Almost half of attendees felt that Indonesia's external vulnerabilities had fallen over the past couple of years, while 30% said they had increased.

The persistent current-account deficit and large stock of government securities held abroad continue to make Indonesia sensitive to shifts in market sentiment. However, the current-account deficit shrank from around 3% of GDP in 2014 to less than 2% last year.

Corporates now well-positioned

Fitch also believes that corporates are now well-positioned to deal with potential currency volatility, partly as a result of new minimum requirements on hedging and ratings for foreign-currency debt. Not all attendees agreed with this view, with three-quarters either "somewhat" or "very" concerned about corporates' foreign-currency debt burden.

Worries about domestic politics most likely reflect the tense Jakarta governor election campaign. The incumbent, Basuki Tjahaja Purnama (known by his nickname, Ahok), was charged with blasphemy in November and has faced large-scale protests organised by Islamic groups.

Fitch does not view instability in Jakarta as a significant direct risk to the economy, but rising opposition to Ahok could be been seen as a challenge to his close ally, President Joko Widodo, popularly known as Jokowi.

Indonesia's difficult business environment has gradually improved since a strong reform drive was launched by Jokowi's government in September 2015.

The reforms should support investment and medium term growth, and were a key factor in our decision to put the sovereign rating on Positive Outlook in December.

Political developments that stall reforms or increase obstacles to their implementation could undermine this positive momentum.

“We were surprised that most attendees' expressed some concern over the likely impact of Basel III adoption by 2019 on bank capital and liquidity,” says Fitch.

“In the view of our banking analysts, most of the large banks would have already met the Basel III capital requirements if the maximum additional capital charges were applied at end-2016, and they also have ample liquidity.

“With regards to proposed bail-in measures for the banking sector, attendees seemed to question the credibility of such a measure, with only one-fifth of the audience believing it would affect sovereign support for uninsured depositors and senior bond holders.” 

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