DBS Group Research economist Radhika Rao notes that S&P Global Ratings maintained Indonesia’s sovereign rating and stable outlook, citing fiscal discipline and expectations for rationalization of flagship spending and improved revenues. However, he stresses that optimism for local assets is being waned by renewed tensions in West Asia, higher yields in the US, a weaker rupee near USD/IDR 18,000 and a much flatter IDR yield curve, limiting the prospects for sustained growth.
S&P support faces external headwinds
“S&P Global Ratings maintained Indonesia’s sovereign rating and stable outlook, departing from its cautious peers. The agency stressed that the country has a history of fiscal discipline under different governments, underpinning its positive credit profile, and takes comfort in assurances that the -3% of GDP deficit target will be met.”
“The positive view was also based on the likelihood that spending on flagship programs, especially the free meals program, would be rationalized, with the expectation that a centralized export agency would increase revenues.”
“Demonstrating a credible commitment to fiscal discipline through a clear medium-term consolidation strategy, stronger revenue mobilization and prudent expenditure management will come in due time.”
“Equally important will be transparent communication on fiscal priorities, financing plans and contingent liabilities, helping to reduce political uncertainty and strengthen confidence in the government’s commitment to debt service. The reduction in downgrade risk has been a tailwind for local asset markets.”
“USD/IDR has returned above 18000, approaching recent lows for the rupee, attracting intervention risks. Compared to pre-conflict levels in West Asia, the 2Y IDR (generic) yield has risen by almost 200 bps, much more than the long end, following interest rate hikes and the official preference to provide attractive differentials, essentially flattening the curve. Until external stressors subside, significant growth in local markets will prove become short-lived.”
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