Fitch Ratings has affirmed Indonesia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB’ with a Stable Outlook.
Among the key ratings driver, Fitch said Indonesia’s rating balances a favourable medium-term growth outlook and low government debt/GDP ratio against weak government revenue and lagging structural features, such as governance indicators, compared with ‘BBB’ category peers. Several external finance metrics, such as its current account, are stronger than pre-Covid-19 pandemic levels, but should normalise to some extent in the next few years, on the assumption that commodity prices will fall further.
The ratings agency’s forecast for GDP growth in 2024 to be broadly stable at 4.9%, slightly down from 5.05% in 2023. It expects slower export momentum in the first of half of this year, given weakening global demand, but strong domestic investment and consumption will most likely support growth, also due in part to spending related to local elections to be held country-wide in November. Fitch forecasts GDP growth to accelerate to 5.3% in 2025, as investment should strengthen following reduced near-term policy uncertainty after a new government takes office in October this year.
Notably consumer price inflation is under control, at 2.8% in February with core inflation even lower at 1.7%. Fitch expects inflation to remain within Indonesia’s inflation target band, that was lowered for this year to 2.5% +/- 1pp, with an end-2024 forecast of 2.7% and a slight increase to 3.0% by end-2025 in line with strengthening economic growth. The agency also believes that Bank Indonesia will cut its policy rates by 75bp to 5.25% later this year, when interest rates start falling in the US, and by another 75bp to 4.5% in 2025.
Fitch assumes broad economic policy continuity in the next government following the recent first round of presidential elections, in which Defence Minister Prabowo Subianto claimed victory. It expects the govt will maintain a focus on infrastructure development, including in the new capital city Nusantara being built in East Kalimantan, and sustain efforts to support commodity down streaming and expand battery and electric-vehicle (EV) manufacturing. Monetary and fiscal policy settings are also likely to remain supportive of macro stability, at least during the remainder of this year.
