Moody's warns Indonesia COVID-19 surge threatens fiscal plans, ratings

 

Indonesia's surge in COVID-19 infections threatens to hamper government plans to reduce its fiscal deficit and could undermine the credit rating of Southeast Asia's biggest economy, Moody's Investors Service said on Monday.

The rating agency's comments came days after S&P Global Ratings said the country's growing coronavirus outbreak was adding downside pressures on its economy and credit conditions.

Moody's rates Indonesia's debt at Baa2, one notch above its lowest investment grade rating, with a stable outlook, similar to Fitch Ratings.

S&P also gives Indonesia the same rating, but it has had a negative outlook on Indonesia's sovereign debt since April 2020.

"Although the effects of recently imposed movement restrictions have yet to show, a resurgence in more infectious mutations of the virus poses significant risks to Indonesia's economic recovery and will challenge government plans to reduce the fiscal deficit to pre-pandemic levels, a credit negative," Moody's said in a statement on Monday.

Indonesia is battling one of the world's worst COVID-19 outbreaks, driven by the more contagious Delta variant, with new infections topping 50,000 in four of the past five days and with around 1,000 deaths each day.

The government has imposed movement restrictions from July 3 and is currently considering whether to extend them beyond Tuesday.

Moody's said it expected Indonesia's economy to grow 4.5% in 2021, following a 2.1% contraction last year.

The government is expected to increase spending on social programmes at a time when revenue growth is unlikely to recover significantly after slumping in 2020, Moody's said.

Moody's forecasts a fiscal deficit of 5.9% of GDP for 2021, slightly larger than the government's 5.7% outlook, and said the government's plan to revert to a deficit cap of 3% in 2023 "is now increasingly under threat because mitigating measures introduced in 2020 are unlikely to be fully unwound."

Moody's praised the government for proposals to overhaul the tax sector, which include raising value added tax rates and introducing a carbon tax, but said "the measures are likely to be placed on the back-burner" due to a fragile economic recovery and political difficulties.

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