President Joko Widodo’s government is facing a widening budget deficit and is anticipating the tax amnesty to help bring finances back in to balance.
“Indonesia’s ratings balance a low government debt burden, favourable growth outlook and limited sovereign exposure to banking-sector risks with a weak external position compared with ‘BBB’ category peers that makes the country relatively vulnerable to shifts in market sentiment and a weak – but improving – business environment,” notes Fitch.
Analysts point out that Widodo is adding jobs in major construction projects for unskilled labor, which could stimulate demand for basic consumer goods. Indonesia’s central bank has lowered interest rates this year, something to be mindful given the hefty financial services weights found in EIDO and IDX.
Fortunately, Indonesia’s sovereign rating is not heavily exposed to the banking sector.
“Fitch considers the sovereign’s exposure to banking sector risks as limited. Private credit represents only 36% of GDP and the banking system’s health is relatively strong, although risks built up in the previous credit cycle imply a more challenging operating environment. This has led to deferral of private-sector capital expenditure and has increased gross non-performing loans to 3.2% of total assets in October 2016, from a low of 1.8% at end-2013. However, the banking sector’s capital adequacy is strong, at 22.9% in October 2016,” adds Fitch.
For more information on the developing economies, visit our emerging markets category.