Indonesian Rupiah: S&P support offset by Rupiah headwinds – Commerzbank

Commerzbank’s Dr. Henry Hao and Moses Lim note S&P Global Ratings affirmed Indonesia’s BBB sovereign rating with a stable outlook, citing fiscal discipline and adherence to the 3% deficit ceiling. Nonetheless, S&P views recent fiscal and external deterioration as temporary but flags higher bond yields and weaker Indonesian Rupiah (IDR) as headwinds. USD/IDR rose toward all-time highs, even as Bank Indonesia (BI) pledged to go all out to keep Rupiah stable.

Rating stable but FX under pressure

"S&P Global Ratings affirmed Indonesia’s BBB sovereign rating and maintained stable outlook yesterday, despite Fitch Ratings and Moody’s Ratings downgrading their outlooks earlier this year. "

"The agency assessed that fiscal policy remains broadly stable, highlighting Indonesia’s “record of fiscal discipline over multiple administrations". This supports its expectation that the statutory budget deficit ceiling of 3% of GDP will continue to be observed."

"S&P Global Ratings views the recent deterioration in fiscal and external positions as temporary. Higher commodity prices and the ongoing rationalisation of the free school meal programme are expected to provide support. However, it flagged higher bond yields and a weaker IDR as headwinds, contributing to a higher interest-to-revenue ratio."

"It also noted that Bank Indonesia (BI) retains operational independence comparable with regional peers. Overall, the decision is more a removal of a potential headwind than a positive catalyst for Indonesian assets."

"In FX, USD/IDR rose 0.3% to 18,105 yesterday, approaching its all-time high level of 18,178 recorded in early June. This was largely due to a stronger USD and higher global crude prices. However, last Tuesday, BI pledged to "go all out to keep the rupiah stable with a tendency to strengthen", signaling an increased urgency to support the IDR."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)