Fitch Upgrades Indonesia to 'BB+'; Outlook Stable

Fitch Ratings-Singapore/London-25 January 2010:

Fitch Ratings has today upgraded the Republic of Indonesia's Long-term foreign and local currency Issuer Default ratings (IDRs) to 'BB+' from 'BB', respectively. The Outlooks on the ratings are Stable. At the same time, the agency upgraded the Country Ceiling to 'BBB-' from 'BB+' and affirmed the Short-term foreign currency IDR at 'B'. "The rating action reflects Indonesia's relative resilience to the severe global financial stress test of 2008-2009 which has been underpinned by continued improvements in the country's public finances, a fundamental sovereign rating strength, and a material easing of external financing constraints," says Ai Ling Ngiam, Director, in Fitch's Sovereign Ratings team.

Public debt ratios continued to decline throughout 2009, falling to 30% of GDP (compared to a 'BB' median of 40%), and international reserves including gold, rose 28% to USD66bn, as the economy recorded the eighth-highest economic growth rate (4.6%) among all Fitch-rated sovereigns. Indonesia's sovereign creditworthiness is backed by its strong public finance track record relative to its peers. Indonesia was one of 15 Fitch-rated sovereigns which registered a year-on-year decline in the general government (GG) debt position as a share of GDP in 2009.

With the current macroeconomic path and fiscal policy framework, Indonesia's public debt/GDP looks set to continue on a downward trend during Fitch's forecast period. "There is fiscal flexibility for the authorities to embark on an ambitious agenda to tackle longer-term developmental issues, such as addressing infrastructure constraints and investment promotion as well as raising industrial and export competitiveness, which are central to further alleviating Fitch's concerns on risks surrounding Indonesia's external finances," adds Miss Ngiam.

However, Fitch says longer-term developmental priorities risk becoming sidelined if fiscal expenditure inefficiencies remain unresolved due to delays in electricity tariff and fuel price adjustments. As a result, incentivised smuggling of oil may add volatility to the balance of payments through abnormal spikes in oil imports. Further, sudden investor risk aversion and capital outflows may arise on the back of more severe or abrupt administrative price adjustments in 2011. Looking ahead, Indonesia's relatively shallow capital markets remain vulnerable to risks surrounding a reversal of high-yield carry trades or sudden emerging-market risk aversion. Policy credibility against potential "hot money" reversals would be bolstered by further strengthening of the monetary policy framework, including achieving greater price and exchange rate stability; deepening of the country's debt and capital markets; and building additional foreign exchange buffers.

The economy is better placed than before to face abrupt portfolio outflows on the back of sudden investor risk aversion or oil price hikes, due to exchange rate flexibility, further improvement in external finances resulting from foreign reserves (FXR) accumulation, lower gross external financing requirements, and a stronger international liquidity position. Fitch forecasts Indonesia's gross external financing requirement, including short-term external debt, at 43% of FXR in 2010, compared with the 'BB' median of 82%. Indonesia's international liquidity ratio is forecast at 192% in 2010 (liquid external assets > liquid external liabilities), the highest since 1990 and higher than the 'BB' median of 185%.

This provides a buffer against temporary closures of international capital markets or sudden reversals in capital flows. In contrast to heightened market volatility and corporate sector loan restructuring during previous periods of global stress, Indonesia fared relatively well during the global financial crisis, which proved to be an important test case for dollar demand pressures, exchange rate stresses and capital flows. Fitch estimates that rollover rates on private sector external debt exceeded 160% during Q109-Q309 as corporates secured sufficient financing from abroad to meet scheduled debt repayment.

Corporates likely benefited from improved profitability, external debt leveraging since the Asian financial crisis and favourable relationships with affiliate foreign parent companies and affiliates. In addition, the systemically important larger banks' low reliance on wholesale funding did not require sovereign support measures and are now well-placed for stronger credit expansion.

Applicable criteria, 'Sovereign Rating Methodology', dated 16 October 2009, are available on www.fitchratings.com. Contact: Ai Ling Ngiam, Singapore, +65 6796 7216. Media Relations: Shivani Sundralingam, Singapore, Tel: + 65 6796 7215, Email: shivani.sundralingam@fitchratings.com. Investor Relations: Shirley Oh, Singapore, +65 6796 7213 / shirley.oh@fitchratings.com. Investor Relations: Wayne Li, Hong Kong, +852 2263 9915 / wayne.li@fitchratings.com. Ratings Desk: Maggie Tang, Hong Kong, +852 2263 9898 / maggie.tang@fitchratings.com. Additional information is available on www.fitchratings.com.