March 17, 2017

12063

Republic of Indonesia
Chief Analyst
xxxxx Analyst

Atsushi Masuda
Shinichi Endo

Long-term Rating

BBB-

Outlook*Positive

Short-term Rating-*Long-term Rating refers to Foreign Currency Long-term Issuer Rating in principle.

made the ruling alliance a majority, resolving the
problem of a divided power between the president andparliament and solidifying his administration’s politicalbase. President Joko carried out his second cabinet
reshuffle in June 2016, which featured the appointmentof Ms. Sri Mulyani Indrawati, former managing directorof the World Bank, as Minister of Finance. Having servedin the same post under the Yudhoyono administrationfrom 2005 and 2010, she was reputed for realizing
remarkable fiscal reforms. The reinforcement of thepolitical base and the appointment of the figures whoare supportive to the reforms have contributed toenhancing the policy effectiveness of the Joko
administration.

1. Outline
Indonesia is an archipelagic country with a large
population and territory, abundant natural resource
endowment and diverse ethnic groups. Its population
counts 258 million (the fourth in the world) and its
territorial coverage totals 1.91 million square meters,
five times larger than Japan.
There are more than 300 ethnic groups inIndonesia, the largest being Javanese. Ethnic Chinese
number 7 million, accounting for about 3% of the total
population. As such, “Unity in Diversity (Bhinneka
Turggal Ika)” has been the national principle since its
independence. The constitution guarantees freedom of
religion. Muslims account for 90% of its total population
while others believe in Christianity, Hindu and Buddhism
among others.
Indonesia’s nominal GDP stood at USD932.7 billion
and the per capita GDP at USD3,603 in 2016.

Economic fundamentals and recent developments
The Indonesian economy is primarily characterized byits high dependence on natural resources. That
dependence, though declining recently, still needs to belowered because the entire economy remains vulnerable
to resource price fluctuations. The value-added shares in
GDP of agriculture-forestry-fisheries and mining-quarry
were high at 13.5% and 7.2%, respectively, in 2016. Their
combined share, at 20.7%, exceeded 20.5% of the
manufacturing sector. The primary sector accounted for
33.1% of the total employment, way higher than 13.1%of the manufacturing sector.
Among the supply-side challenges facing theIndonesian economy, an insufficient infrastructure
stemming from an inadequate investment environment
peculiar to an emerging country is frequently pointed
out as a bottleneck to economic growth. Delayeddevelopment of infrastructure such as railways androads is evident in the main cities including capital

2. Political and social situation
Mr. Joko Widodo, former governor of the Jakarta
special district, was elected president in the election in
July 2014 and assumed the office in October that year.
He is in his first term of presidency that continues until
October 2019. Upon its inauguration, his administration
had to rely on a minority ruling alliance, which posed
concern over its ability to execute policy. However,President Joko initiated a process to buttress his rulingcoalition by appointing Mr. Luhut Panjaitan as Chief ofStaff in early 2015. After his first cabinet reshuffle inAugust 2015, the National Mandate Party (PAN) joined
the ruling alliance in September 2015, followed by the
Party of Functional Group (Golkar) in May 2016. This

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Issuer Report
Jakarta, where traffic jam is chronic and serious. Facewith the situation, President Joko launched a series of
economic policy packages in September 2015, when the
Fed’s first interest rate hike in 10 years was in sight. His
administration enforced a total of 14 policy packages by
the end of 2016. Those included a broad range ofstructural reforms such as ones aimed to improve theindustrial competitiveness and social purchasing power,
expand investments and exports, and enhance theefficiency of the transportation and tourism sectors.
Thanks to these government efforts, Indonesia’s ranking
in the World Bank’s ease of doing business survey
jumped to 114th, 109th and 91st during the Joko
administration from 120th level previously. Direct
investment grew 12.4% year-on-year to 612.2 trillion
rupiah in 2016, outperforming the government target by
3%. These indicate that the government efforts toimprove the investment environment have begun to
produce results.
Turning to the demand side, a buoyant private
consumption may well be counted as a major driving
force for the economy. The country’s annual real GDP
growth rates in the 10 years from 2006 to 2016 averaged
5.6%, of which 2.9ppt came from private consumption.
Prominent in the background are a steady growth of thetotal population and the presence of an ample youth
population. The total population grew a solid 1.51% peryear during the same 10 years. Young people under 29
years of age accounted for 52.5% of the total population.
A U.N. projection estimates the country’s youth
population ratio will still stay high at 47.1% in 2030.
The Indonesian economy, which had kept a moderate
slowdown after peaking out in 2010, grew 5.02% in real
GDP terms in 2016. The first growth higher than 5% in
two years was led by a pickup of private consumption.
Bank Indonesia’s six rate cuts totaling 150 bps during theperiod from January to October 2016 greatly contributed
to supporting the economic recovery.

fuel exports, which normally account for 20% of the totalexport value. Factors responsible for the reduced fuelexports included a growing energy demand at home, theeconomic slowdown in China, the main destination of
the exports, and the fall of resource prices. Recently,
however, the trade surplus has been widening thanks tothe bottoming out of resource prices and the economic
recovery in the foreign trade partners. The current
account deficit-to-GDP ratio fell from 3.2% in 2013 to
3.1% in 2014, 2.0% in 2015 and 1.8% in 2016.
Notable in the financial account is the growing
volatility of portfolio investments by non-residents. A
massive capital outflow occurred as investors adopted arisk-off stance and U.S. interest rates went up after the
U.S. presidential election in November 2016. According toan estimate by the Institute of International Finance (IIF),
a net capital outflow totaled US$2.38 billion in November
alone. This was the second-largest next to the US$4.01
billion registered during the tapering tantrum in 2013.
Bank Indonesia countered the outflow in 2013 with alarge-scale market intervention to defend the rupiahdollar exchange rate. However, it failed to stem the
expanding imbalances. The rupiah depreciated by 16.2%
and the foreign reserves tumbled by US$9.47 billion
during the period from May to September 2013. However,the situation was remarkably different with the capitaloutflow in November 2016. While Bank Indonesia kept its
stance to care for exchange rate stability in line with the“Foreign Exchange Rate Stabilization Policy” announced in
September 2015, it primarily relied on prudential
regulations without resorting to any massive market
intervention. The rupiah-dollar exchange rate has been
staying stable since the end of 2016. The foreign reserves
did decline by US$3.57 billion in November but resumed
an uptrend from December onward. The reserves swelled
to US$114.4 billion at the end of 2016, or equivalent to
8.6 months of imports and 2.7 times of short-term
external debt.
Meanwhile, the external borrowing by Indonesia’s
private sector grew substantially during the period from2010 to 2014 amid the large-scale monetary easing byadvanced countries after the Lehman shock. As much as
90% of the private-sector external debt is denominatedin the US dollar, with only 4% in the local currency. An
insufficient hedging of exchange risks could inflate thesector’s debt burden in rupiah terms should thecurrency depreciate markedly. In Indonesia, the private
sector’s external vulnerability through such exchange
rate channel had been prominent since 2010.
Amid the growing speculation in the fall of 2015 that

4. External sector
Indonesia’s balance of payments is characterized by astructure in which continuous current account deficits
are financed by financial account surpluses. However, astable financing of the current account deficits poses amajor challenge since the financial account balancetends to fluctuate widely.
The current account has been in deficit since 2012.
Mainly to blame for this was a shrinking trade surplus.
Much of the contraction came from a decline in fossil<2>Issuer Report
the Fed might go ahead with its first policy rate hike in
10 years, the market was increasingly wary about
possible capital flight into the U.S. and depreciation of
the rupiah’s exchange rate. Bank Indonesia responded
by beefing up its prudential regulations. It introduced instages such measures as the hedge ratio regulation(from January 2015), the liquidity ratio regulation (ditto)
and the rating requirements (January 2016) with the aimof curbing the external borrowing by non-financial
corporations. The central bank also took successive
measures to alleviate the external fragility through theexchange rate channel by introducing a mandatory
settlement of commercial transactions in the rupiah inMarch 2015 and announcing an exchange ratestabilization policy in September 2015. Under thesepolicy measures, the private sector’s external debt
decreased by 5.6% to US$158.7 billion at the end of2016 for the first year-on-year contraction since 2005.
Bank Indonesia’s prudential regulations have begun totake effect.
The external debt-to-GDP ratio had kept rising toreach 36.1% in 2015 after hitting rock bottom at 25.2%
in 2011. However, the ratio fell to 34.0% in 2016 as aresult of the curb on the private sector’s externalborrowing, indicating that the surge of the external debt
has now come to a halt. Nevertheless, not all theindicators related to external debt are improving. The
external debt-to-exports (goods and services) ratio rosefrom 105.8% in 2011 to 188.0% in 2016. Given that theprivate-sector debt accounts for about a half of thecountry’s total external debt, a continued curb on
private external borrowing and a change in the export
composition in favor of a shift to higher value-added
manufacturing goods will hold the key to enhancing
Indonesia’s resilience to external shocks.

subsidy outlays often exceeded the initial budget
appropriations in the past. During the last 10 years, such
shortfalls were particularly prominent in 2008, 2011 and2012. Before the reform, the fuel subsidy had accounted
for around 20% of the total budget outlay. The fuelsubsidy, equivalent to 3% of the GDP, had been a strain
on the government expenditures.
The 2015 reform allowed the retail fuel prices tomove in tandem with the international market prices.
The government’s subsidy outlay drastically shrank,helped in part by the fall of global oil prices in the year.
In 2016, the ratios of the fuel subsidy to the total
government expenditure and GDP fell to 5.1% and 0.8%
respectively, a substantial reduction from the pre-reform
levels.
The fiscal leeway generated by the reform could bediverted to capital expenditure on public projects suchas infrastructure development. The share of capitalspending in the total government expenditure rose fromthe pre-reform levels of 8-9% to 11.1% in 2016.
The government also implemented a tax amnesty
program as a temporary act valid from July 2016 to
March 2017 with the aim of capturing tax-evaded assets
and enhancing tax collection. The total value of such
assets harbored in foreign countries, Singapore inparticular, is estimated at around 4,000 trillion rupiah.
Those who declare their assets or repatriate saleproceeds during the program period would be exemptedfrom possible additional taxation or criminal charges.
This program produced good results by bringing about
109.5 trillion rupiah in additional tax revenue at the endof 2016.
Minister of Finance Suri Mulyani, who was newly
appointed in the cabinet reshuffle in July 2016, has been
making efforts to secure the investor confidence bycompiling a realistic and credible budget free of
optimistic assumptions. Under her leadership, thebudget deficit-to-GDP ratio was cut to 2.46% in 2016
from 2.59% in 2015 through spending cuts andenhanced efficiency. The 2017 budget envisages anincreased public investment and a further cut of the
deficit ratio to 2.41% through an additional curb on
subsidy expenditures. The budget thereby pursues twotargets of economic growth and fiscal consolidation. The
public debt-to-GDP ratio was held to 27.9% in 2016. The
ratio is projected to stay stable at mid-20% levels. Thus
the government has been building up its track records ofsteady fiscal management.
However, the Joko administration is still faced withsome challenges. The capital expenditure has been

5. Fiscal policy
Indonesia’s fiscal policy is defined by the rules set in
the 2003 State Finances Law. The rules specifically set
the caps on the fiscal deficit-to-GDP ratio and the public
debt-to-GDP ratio at 3% and 60% respectively.
The fuel subsidy reform which the Joko
administration implemented in 2015 is one of its policy
measures that has produced the greatest effect. Before
the reform, the retail fuel price was set below theinternational prices, with the balance footed by thegovernment. This means that international prices higher
than the levels assumed by the government inevitably
leave a budget shortfall. For this reason, the actual<3>Issuer Reportincreasing but its level still remained lower at 1.7% of
GDP in 2016. Acceleration of infrastructure developmentby the government is keenly needed in order to alleviate
the infrastructure bottlenecks. His administration also
has a host of challenges to address in the aspect of fiscal
revenue. The government revenue-to-GDP ratio stood at
12.5% in 2016, which is lower than those of othersovereign peers rated in the BBB range by JCR, such as
the Philippine (15.5%), Turkey (21.8%), and Brazil(36.0%). Indonesia’s taxation base still needs to bebroadened.

longer term.

7. Conclusion and Rating Outlook
The sovereign ratings for Indonesia mainly reflect
Indonesia’s solid economic growth underpinned bydomestic consumption, restrained level of budget deficit
and public debt, resilience to external shocks supportedby the flexible exchange rate policy and accumulation of
the foreign exchange reserves, and financial soundnessof the banking sector. Meanwhile, the ratings areconstrained by its still high dependence on raw
commodities, volatile private capital inflows amid
continued needs of current account deficits control,
inadequate infrastructure and an investment
environment which needs further improvements, andhigh dependence of private sector on externalborrowing behind undersized financial system.
JCR changed the rating outlook from Stable toPositive in March 2017, based on the recent
improvement on the investment climate promoted by aseries of Economic Policy Packages and the containmentof private external debt brought by Bank Indonesia’s
prudential regulations on external borrowing.
The Indonesian economy is bottoming out since
resource prices have stopped falling. JCR holds that it isessential for the authorities to accelerate structuralreforms to ensure long-term sustainable growth bycapitalizing on that tail wind. Specifically, JCR will
monitor future developments on the following points
and have them reflected on its ratings, in the first place,acceleration of infrastructure development, secondly,
promotion of foreign direct investment throughimprovement of the investment environment, andthirdly, further continued curtailment of private externalborrowing.
As quantitative indices used to assess the progress, JR
will particularly focus on (1) monthly implementation of
government investment expenditures, (2) quarterly
inflows of foreign direct investment, and (3) monthly
outstanding balance of private-sector external debt.

6. Financial sector
Indonesia’s banking sector stays generally sound, withthe capital adequacy ratio and the nonperforming loan
ratio (at commercial banks) standing at 22.9% and 2.9%,
respectively, at the end of 2016. The NPL ratio made aparticularly remarkable improvement as compared to
7.6% at the end of 2005. The growth of credit supply tothe private sector accelerated from 9.6% in 2015 to
11.0% in 2016.
Yet the banking sector still faces a number ofchallenges. The government has been looking toconsolidate the banking sector through mergers since it
introduced its “Banking Architecture (API)” in 2004.
However, the consolidation has not progressed well as
the number of banks only dropped to 116 by the end of2016 from just over 130 at the start of the API. The
lending rate charged by banks remains relatively high(only down from 12.66% in 2015 to 11.89% in 2016)
despite a series of policy rate hikes by Bank Indonesia.
The fall in the lending rate has been smaller than that ofthe deposit rate (from 8.34% in 2015 to 11.89% in 2016).
The banking sector also has a long-pending issue ofbeing too small in comparison to the size of thecountry’s economy. The ratio of money stock (M2) toGDP (an indicator of money stock held by the economic
entities) stood at 39.9% at the end of 2016, which ismuch lower than those of the peers in the JCR BBB range
such as India (81.5%), the Philippines (63.2%) and Turkey(54.0%). The delay in financial deepening has compelled
the private sector to rely on foreign currency borrowing
for funds to finance the investments required for
economic growth. As seen above, the externalborrowing by the private sector is restrained at the
moment through Bank Indonesia’s prudential
regulations. With the country’s financing requirements
expected to expand to support its economic growth, afurther financial deepening is crucially needed in the<4>Issuer Report12063● Main Economic Indicators

Republic of Indonesia
FY2011FY2012FY2013

FY2014FY2015

Real GDP growth

%

6.0

5.6

5.0

4.8

5.0

CPI inflation rate(period average)

%

4.3

6.4

6.4

6.4

3.5

Central government fiscal balance / GDP

%

-1.8

-2.2

-2.1

-2.6

-2.5

Central government primary balance / GDP

%

-0.6

-1.0

-0.9

-1.2

-0.9

Central government debt / GDP

%

23.0

24.9

24.7

27.4

27.9

Current account / GDP

%

-2.7

-3.2

-3.1

-2.1

-1.8

Trade balance / GDP

%

0.9

0.6

0.8

1.5

1.6

Financial account / GDP

%

-2.8

-2.4

-5.0

-2.0

-2.7

Foreign reserves

USD bn

112.8

99.4

111.9

105.9

114.4

In months of imports of goods and services

months

6.4

5.6

6.7

7.7

8.6

Rupiah per US dollar (period average)

IDR/USD

9,387

10,461

11,865

13,38913,309External debt / GDP

%

27.5

29.2

32.9

36.1

34.0

External debt / exports of goods and services

%

119.6

129.8

147.5

182.1

188.0

Foreign reserves / short term external debt

x

2.5

2.3

2.5

2.7

2.7

Debt service / exports of goods and services

%

17.7

19.9

23.8

32.6

33.5

(Source) Bank Indonesia, Ministry of Finance、Central Bureau of Statistics, and CEIC

● Ratings(millions of yen)

RatingOutlook*

Series E (2015)

BBB-

-

Series F (2015)

BBB-

-

Foreign Currency Long-term Issuer Rating

BBB-

Positive

Local Currency Long-term Issuer Rating

BBB

Positive

Amount<5>Rate (%)

Issue Date

Maturity Date

Release22,5001.08

2015.08.13

2018.08.13

2017.03.07

22,5001.38

2015.08.13

2020.08.13

2017.03.07

-

-

-

-

2017.03.07

-

-

-

-

2017.03.07

Issuer Report● History of Long-term Issuer Rating
Date

Rating(Long-term Issuer Rating or its equivalent)

Outlook*

Issuer Name

2002.10.25

B

Republic of Indonesia

2004.05.26

B+

Republic of Indonesia

2006.09.21

BB-

StableRepublic of Indonesia

2007.09.06

BB

Positive

Republic of Indonesia

2009.02.05

BB

StableRepublic of Indonesia

2009.07.07

BB+

StableRepublic of Indonesia

2010.07.13

BBB-

StableRepublic of Indonesia

2017.03.07

BBB-

Positive

Republic of Indonesia*Outlook for long-term issuer rating, or direction in case of Credit Monitor

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