By Gayatri Suroyo and Stefanno Sulaiman
JAKARTA, March 4 (Reuters) – Fitch Ratings on Wednesday cut Indonesia’s credit rating outlook to negative from stable, citing increasing uncertainty and reduced credibility in policymaking, in a move that will add to investor concerns about Southeast Asia’s largest economy.
Fitch became the second rating agency to revise down Indonesia’s sovereign rating outlook this year, after Moody’s last month cut its outlook due to what it said was reduced predictability in policymaking.
Both agencies have maintained Indonesia at the second-to-lowest investment grade rating, and a negative outlook means the agency’s next rating action could be a downgrade.
The earlier Moody’s outlook cut rattled Indonesia’s financial markets and followed index provider MSCI flagging transparency issues in the stock market, which triggered a $120 billion rout.
‘CENTRALISATION OF POLICYMAKING AUTHORITY’
“The outlook revision reflects increasing policy uncertainty and erosion of Indonesia’s policy mix consistency and credibility amid growing centralisation of policymaking authority,” Fitch said.
“This could weaken the medium-term fiscal outlook, undermine investor sentiment, and put pressure on external buffers.”
In response to the Fitch move, Indonesia’s finance ministry said the government was committed to maintaining macroeconomic stability and fiscal discipline as mandated by law.
Its spending acceleration and economic stimulus would be carried out in a measured manner, bearing in mind fiscal health, it said.
Among the drivers of the outlook downgrade is a potential substantial loosening of the fiscal and monetary policy mix, stemming from the government’s focus on lifting economic growth to 8% from around 5% now, Fitch said.
It highlighted parliament’s plan to review Indonesia’s state finance law, which mandates the government keep its annual fiscal deficit under 3% of GDP and public debt at a maximum of 60% of GDP.
“Material relaxation of the longstanding fiscal framework, including the 3% deficit ceiling, would likely weaken policy credibility and the ability to finance higher fiscal deficits without support from the central bank,” Fitch said.
A potential revision to these fiscal limits has been a major investor concern, especially as President Prabowo Subianto presses ahead with his costly welfare projects, such as his flagship $20 billion free school meal programme, amid weak revenue collection.
Fitch said it expected this year’s budget deficit to be 2.9% of GDP, wider than the government’s 2.7% target, while predicting Bank Indonesia would cut rates by 50 basis points more this year.
WEALTH FUND RISK
The rupiah and Indonesian financial markets were already under pressure before the Fitch announcement, amid investor fears of a surge in global inflation after oil prices rose due to the conflict in Iran.
Fitch also flagged contingent liability risk from investments by new sovereign wealth fund Danantara and risk to BI from the expansion of central bank mandate.
The finance ministry said Danantara would become a growth engine driving investment, pledging that it will be managed in a credible manner.
The central bank did not immediately respond to requests for comment.
S&P is the only major rating agency that has yet to review Indonesia’s credit rating this year. It currently rates Indonesia BBB with a stable outlook.
Fitch said factors that could lead to a ratings downgrade include a buildup of economic vulnerabilities, such as from a further weakening of the policy framework, a material increase in public debt, or a sharp decline in foreign exchange reserve buffers.
(Reporting by Gayatri Suroyo, Ananda Teresia, Stefanno Sulaiman in Jakarta and Rae Wee in Singapore; Editing by Martin Petty and John Mair)
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