TEXT-Fitch: Indonesia's external finances showing strains

(The following statement was released by the rating agency)

Oct 05 - Fitch Ratings says in a new report that Indonesia's external finances came under strain in recent months but it does not believe this has weakened the credit profile materially.

Fitch says a combination of strong domestic demand, weakening global demand, high global crude oil prices, and falls in the price of key commodity exports led to deterioration in the basic balance (current account plus net foreign direct investments). This left the external finances exposed to shifts in risk sentiment associated with short-term capital flows. This has been exacerbated by an accommodative monetary policy and political reluctance to raise domestic fuel prices that might have reduced the import bill. Strong pressure on the rupiah prompted Bank Indonesia (BI) to intervene in foreign exchange markets to support the currency, leading to a 8.5%/USD10bn decline in foreign exchange reserves in Q212.

Responsibility for averting a build-up of macroeconomic imbalances will likely fall on BI. Fitch expects BI will take sufficient corrective action to limit pressures on the external finances and the sovereign credit profile. This is likely to centre on greater tolerance of currency flexibility, as well as tighter policy settings to avert economic overheating and minimise deterioration in the domestic savings-investment balance. This would place the economy on a more sustainable trajectory in line with Fitch's expectation for 6% GDP growth in 2012.

The report, "Indonesian External Finances", is available from

or by clicking on the link above.

Link to Fitch Ratings' Report: Indonesia External Finances

((Bangalore Ratings Team, Hotline: +91 80 4135 5898 Debanjali.Ghosh@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Debanjali.Ghosh.reuters.com@reuters.net))