Fitch: Indonesia’s Credit Profile Still Sound
Indonesia’s credit profile remains sound, even though its external balance came under strain in recent months, exposing it to risks associated with short-term capital flows, a rating agency said.
Fitch Ratings called on the country’s central bank to impose a tight monetary policy, to prevent the economy from overheating — where economic demand outgrows a country’s capacity to produce — and resulting in high levels of inflation.
Fitch made the assessment in a press statement released on Friday.
Indonesian officials and economists downplayed concerns of an “overheating” economy.
Southeast Asia’s largest economy posted a deteriorating external balance in recent months, due to a combination of strong domestic demand, sluggish global demand and high global crude oil prices. Falling prices of the country’s key commodities were a contributing factor.
Fitch Ratings raised Indonesia’s sovereign debt rating to investment grade last December. Moody’s Investors Service followed with a similar move a month later.
The country posted a record $6.9 billion current account deficit in the second quarter of this year, equal to 3.2 percent of the country’s gross domestic product. The current account is the difference between a country’s total exports of goods and services and its imports of them.
When a country posts a current account deficit,that means it spends more than it earns.
Fitch, “does not believe this has weakened the credit profile,” it said in the statement. The rating agency expects Bank Indonesia to limit pressures on the external balances and the country’s sovereign credit profile.
“This is likely to center on greater tolerance of currency flexibility, as well as tighter policy settings to avert economic overheating and minimize deterioration in the domestic savings-investment balance,” Fitch said, adding that those actions would enable the economy to grow by 6 percent this year.
Helmi Arman, an economist at Citibank Indonesia in Jakarta, said that a current account deficit is not always bad for the economy.
The deficit in the current account shows that imports rose due to increasing demand for capital goods, which in turn, boosted the country’s production capacity to keep up with economic growth.
“Any corresponding increase to domestic capacity in the medium term should lead to more import substitution which may help put a lid on trade balance pressure,” Helmi said in a release on Friday.
Edimon Ginting, senior economist at the Asian Development Bank Resident Mission in Indonesia, said that Indonesia’s current account would be at 2.1 percent of GDP this year before recovering to 1.4 percent of GDP next year.
“But that is not a sign of overheating as many might have thought,” Edimon said.
He agreed that domestic production capacity would increase. On top of this year, he said, the rupiah’s depreciation — down 5.8 percent against the dollar year to date — would help exports and curb consumer goods import.
A weak rupiah will increase the cost of importing goods but at the same time will also boost earnings for exporters that want to repatriate overseas revenue.
Edimon and Helmi said that the growth in lending by the country’s commercial banks went to productive sectors. They said that in turn negates the worries of an overheating economy.