Indonesia’s Covid struggle heightens credit risks, S&P says

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KUALA LUMPUR: A Covid-19 resurgence is exacerbating downside pressures for Indonesia’s economy and credit conditions, S&P Global Ratings said on Thursday.

A delayed economic recovery will drag on revenue for banks, most corporate sectors, and the government budget, it said in its report entitled “Indonesia’s Covid-19 struggle”.

“Existing credit buffers on Indonesian ratings will be chipped away if ongoing lockdowns are prolonged,” said S&P Global Ratings credit analyst Eunice Tan.

The ongoing Covid-19 wave is more severe than earlier outbreaks in the country and could have material implications on the operating capacity of the economy due to mitigation measures and voluntary social distancing.

“We lower our economic forecast for 2021 to 3.4% from 4.4% earlier, while 2022 growth will be higher on base effects at 5.6% from 5.2% earlier,” said Vishrut Rana, an Asia-Pacific economist at S&P Global Ratings.

The rating agency said its downside forecast for 2021 is 2.3%, under a more onerous set of assumptions.

S&P Global Ratings said movement restrictions reinstated on July 3 may be lifted in a month.

However, the degree of uncertainty is high, given extremely contagious variants (such as Delta), limited vaccine coverage in the population, and vaccine shortages.

A weaker economic recovery will weigh on the government’s fiscal performance this year, keeping deficits high for longer.

It forecasts the general government’s deficit at 6.0% of GDP in 2021, versus the government’s budgeted 5.7% shortfall.

It also has a negative outlook on its long-term “BBB” sovereign rating for Indonesia.

S&P Global Ratings sovereign credit analyst Andrew Wood pointed out higher deficits and a lower revenue base would place additional pressure on Indonesia’s interest burden debt metrics, which are weaker than they were prior to the pandemic.

However, a favourable external setting is offsetting some of the domestic pain. Strong goods exports through most of the first-half of 2021, higher commodity prices, and more positive demand conditions will help limit economic and revenue fallout.

It also noted selective extension of credit by both banks and capital markets to Indonesian corporates means refinancing conditions will remain tight.

This and the slower recovery could widen divergence in credit quality among Indonesian corporates. Mobility-sensitive sectors such as retail, cyclical transportation, and tourism could see problems compounding.

Nearly 40% of the rating agency’s outstanding ratings on non-financial entities remain on negative outlook or CreditWatch with negative implications as of July 12, 2021.

“Relative to other country’s rated corporates in Asia-Pacific, this is the highest negative proportion.

“Our corporate ratings and outlook distribution had assumed further downside in credit quality for the rest of 2021 despite a gradual recovery in macroeconomic conditions at the beginning of the year.

“As such do not expect resultant credit metrics to deteriorate to such an extent as to warrant widespread and immediate rating actions.

“The Covid resurgence could derail financial institutions’ recovery and higher restructured loans could emerge. Although profit margins remain resilient, the big test on asset quality will come when regulatory forbearance measures are withdrawn in early 2022.

“Nonetheless, Indonesia has one of the region’s most profitable banking sectors, and has built up credit buffers over the years as a result,” it said.



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