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R&I - Rating and Investment Information Inc. : Republic of Indonesia:R&I Upgrades to BBB-/a-2, Stable

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10/18/2012 | 02:44am EDT

NEWS RELEASE

R&I Upgrades to BBB-/a-2, Stable: Republic of Indonesia


Oct 18, 2012
Rating and Investment Information, Inc. (R&I) has announced the following:

ISSUER: Republic of Indonesia Foreign Currency Issuer Rating: BBB-, Previously BB+ Rating Outlook: Stable Foreign Currency Short-term Debts: a-2, Previously a-3 RATIONALE:

With the global economy slowing down, Indonesia maintains relatively high economic growth. Its fiscal management remains conservative, and the government's debt burden is kept low. The financial system has also become more stable. Greater trust in its economy has led to an increase in foreign investment, and reinforcement of the industrial base has been progressing gradually. The current account balance for
2012 may slip into deficit because of its increasing imports of capital goods in response to expanded investments and production. Given the country's rising savings rate, however, the current account deficit is expected to be limited. R&I has upgraded the Foreign Currency Issuer Rating for Indonesia to BBB- based on its view that the current situation allows the country to achieve sustainable economic development. The Rating Outlook is Stable.
Indonesia's population of 240 million is the largest in Southeast Asia and the fourth largest in the world,
and its ratio of working-age to non-working-age population will be kept above 2.0 until around 2030. Moreover, the country is endowed with rich natural resources. With the savings rate dramatically rising since 2009, an environment that supports investment and facilitates economic growth is being developed. The real gross domestic product (GDP) growth rate is likely to reach approximately 6% again in 2012. Although external demand is weak due to the impact of the European debt crisis, solid domestic demand underpins aggregate demand.
Declining unemployment and improved personal income, as well as stabilized prices and low interest rates, are boosting private consumption. Thanks partly to political stability, foreign direct investment, particularly from Japanese companies that are suffering from the strong yen and higher costs, has increased, and this has made investment more active. Indonesia's automobile industry, though it started late, has grown as the second major production base in Southeast Asia after Thailand.
For 2012, trade surplus is contracting because while growth in exports is slowing down, imports, particularly of capital goods, are on the rise. Partly because income balance deficit is widening with dividend remittances increasing due to expansion in foreign direct investment, the current account balance may move into deficit. However, the current account deficit is expected to be small and mostly financed by direct investment. The impact on exchange rates will likely be limited.
Thanks to conservative fiscal management, the fiscal deficit has been marginal. The outstanding
government debt is projected to drop to the 23% level of GDP at the end of 2012. That said, the government's fiscal structure is vulnerable with revenues only standing at approximately 16% of GDP and subsidies accounting for approximately 20% of expenditures. If fuel subsidies balloon due to a rise in crude oil prices, a budget for infrastructure investment may be squeezed.
Although the economy is put on a growth path, Indonesia's per capita GDP is still around US$3,500. Indonesia lags far behind in the development of social infrastructure, including roads, railways, ports and water systems, which is essential to upgrade its industrial structure. In order to boost public investments, it is necessary to increase revenues by strengthening the taxation base while streamlining such
expenditures as fuel subsidies. R&I will closely observe developments in these policies to discern whether
Indonesia will be able to further solidify a foundation for growth.

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