Fitch: Indonesia Vulnerable to External-Account Destabilisation Compared to Regional Peers
Jakarta. Indonesia is seen as more vulnerable to external-account destabilisation when compared to its regional peers India and the Philippines, international ratings agency Fitch Ratings said in a recent report.
Fitch, which upgraded Indonesia’s rating to investment grade in 2011 (BBB-, the lowest investment grade rating), highlighted that the country’s economic growth slowed to 4.7 percent year-on-year in the first quarter of 2015, which is the record lowest rate since the 2009 financial crisis.
The rating agency also noted that the Indonesian government continues to face challenges in dealing with slowing domestic economic growth caused by falling global prices. It is also struggling to boost infrastructure spending to help propel growth.
“Macroeconomic stability is more important than higher real GDP growth for maintaining Indonesia’s ‘BBB-’ rating,” Fitch said.
Meanwhile, India and the Philippines are experiencing improved business environments, which have led to higher investment opportunities for both countries, Fitch said.
Higher support for investment in India and the Philippines remains the main reason for higher levels of security when it comes to evaluating the effect of external accounts.
Fitch also warned that Indonesia could face external financing difficulties and a weaker investor confidence if the country fails to deal with the “sharp and sustained external shocks.”
The rating agency praised Indonesia’s central bank move to tighten its monetary policy to help reduce macroeconomic risks caused by investors’ speculation over the Federal Reserves’ tapering, which has led to jitters in the domestic financial market since 2013.
Fitch noted that the central bank has eased its monetary policy by cutting its key interest rate by 25 basis points in February 2015 to 7.5 percent to help spur growth.
However, further monetary easing amid the slow growth environment “is likely to be complicated by inflation levels that remain high and risks to external stability.”
Indonesia’s annual inflation rate accelerated to the highest pace in five-months in May due to rising food, tobacco and electricity prices ahead of the Muslim fasting month of Ramadan.
The consumer price index, a measure of inflation, increased by 7.15 percent year-on-year, data from the statistics bureau showed. That was the fastest pace since December’s 8.36 percent annual gain.
Fitch also noted that if the government follows through its structural refom and progresses well in its infrastructure development plan, then it may allow for a higher sustainable GDP growth.
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