Ratings agencies maintain stable outlook on Indonesia despite hike in fuel prices

Standard & Poor’s (S&P), which downgraded Indonesia’s credit rating outlook to “stable” from “positive” in May due to uncertainty over ballooning fuel subsidies, believes the impact of the fuel-price hike on the state’s coffers will be minimal.

Moody’s Investors Service is also keeping the country’s credit rating at “stable”.

The stable outlook for Indonesia’s debt paper “remains valid” at present, according to Agost Benard, an associate director of Asia-Pacific Sovereign with S&P. 

“The magnitude of price rises does not address the fundamental vulnerability of fiscal and external balances to fuel subsidies in a lasting manner,” he said yesterday. “The continued rise in domestic fuel consumption, coupled with declining domestic production – if global oil prices were to rise, suggests that at some point in the future fuel subsidies will again emerge as a pressure on fiscal and external balances.”

S&P is the only member of the so-called Big Three ratings agencies that is yet to award Indonesia investment-grade status. Fitch Ratings gave Indonesia’s debt paper investment-grade credentials in December 2011, with Moody’s following suit a month later.

International ratings agencies function as advisers to prospective investors by assessing the creditworthiness of debt paper issued by governments or the private sector. 

A government’s debt paper whose outlook is rated as positive has a better chance of winning a ratings upgrade, especially when compared to those rated as stable, or even negative (the latter could face the possibility of a downgrade).

S&P, Moody’s and Fitch have all previously stated that Indonesia’s credit profile is under threat from the country’s deteriorating external imbalances, blamed mainly on the soaring fuel subsidies.

After months of uncertainty, the government last week moved to address such concerns by increasing the price of subsidised Premium gasoline by 44 per cent to 6,500 rupiah (Bt20.2), and diesel by 22 per cent to 5,500 rupiah. The subsidy cut, albeit on a modest scale, will still benefit Indonesia and its credit rating, according to Moody’s. 

“It’s because it will incur lower expenses and keep the fiscal deficit under the legal deficit cap of 3 per cent of GDP [gross domestic product],” Moody’s said in a statement released yesterday.

The adjustment in fuel prices is also a credit positive for state oil and gas company PT Pertamina, which has had to sell fuel below cost and then await reimbursement from the government. “We estimate that Pertamina will save $3.6 billion in upfront subsidy costs in 2013, alleviating pressure on the company’s working capital,” said Moody’s. 

Moody’s noted that the pattern of under-spending on capital expenditure would offset the government’s tendency to exceed its budgeted allocation for subsidies, thus capping the upside risk to the revised budget deficit target of 2.4 per cent of GDP.

In the first half of the year Indonesia only managed to disburse 14.4 per cent, or 26.6 trillion rupiah, of the total budget earmarked for capital expenditure, which comprise spending on assets and infrastructure projects needed to spur growth. The figure was 2 per cent lower than last year, according to Deputy Finance Minister Anny Ratnawati.