Fitch Ratings Says Indonesia's External Finances Are Weak

Indonesia's 2012 data on balance of payments underlined the pressure applied to the sovereign's external finances, remaining consistent with an investment grade, according to international agency Fitch Ratings. 

“Indeed, we believe the sovereign external balance sheet will strengthen despite the emergence of a current account deficit [CAD] in 2012,” Fitch Ratings said in a statement released on Tuesday. 

Bank Indonesia (BI) announced a balance of payments surplus of $2 billion for 2012, significantly lower than the $11.9 billion surplus recorded in 2011. The country posted its first annual CAD since 1997 — around 2.7 percent of GDP — but this was offset by the capital and financial account surplus. 

The external finances are a long-standing weakness in the Indonesian sovereign credit profile, and exposure to a potential external liquidity shock remains high.

Robust domestic demand growth has been a driver of Indonesia's CAD, in turn partly reflecting loose monetary and credit conditions.

"We believe BI puts a relatively high weight on fostering growth among its policy priorities. Nonetheless, we expect BI will ultimately pursue policies aimed at averting overheating and ensuring economic and financial stability," Fitch Ratings said.

The international ratings agency added that it remained to be seen whether BI's willingness to tolerate currency volatility decreases. Currency flexibility is a key tool for BI in its efforts to avoid a potential build-up of macroeconomic imbalances.

BI intervention to support the currency contributed to a 3.5 percent decline in Foreign Exchange reserves to $ 108.8 billion in January from $112.8 billion in December 2012.

The reserve level is the lowest in six months, but is equivalent to more than six months of imports.

Fitch affirmed Indonesia's sovereign rating at 'BBB-' with a Stable Outlook in November and believes the current figures are consistent with this view.

Additionally, based on Fitch's projections, Indonesia still has the potential to become a net sovereign external creditor in the coming years. 

Indonesia's 2014 presidential elections are expected to limit prospects for economic, fiscal and institutional reform, suggesting responsibility for any required economic adjustment will lie with BI.

Such reform could address existing weaknesses in the sovereign credit profile and may ease pressure on the external finances, Fitch Ratings said.-The Jakarta Globe (February 20, 2013)