Last year’s hardest-hit sectors of property, construction and automotive are expected to lead Indonesia’s recovery this year as they bounce back from the pandemic-induced slump on strong fiscal incentives, says Fitch Ratings. Director Olly Prayudi and associate director Salman Alamsyah of the global credit rating agency said the three sectors could see improvements this year, although not to pre-pandemic levels just yet. “The sectors that will recover are those that took the hardest hit last year,” Salman told The Jakarta Post in a video interview on Monday. “Last year, we made the most downgrade in the construction and property sectors, aside from the textile sector.” With the COVID-19 crisis battering companies in liquidity and profitability, Fitch made 53 downgrades last year, the majority during the second and third quarters when Indonesia imposed strict mobility restrictions. “But the recovery will depend on the company itself,” Salman added. “In the property sector for example, it may favor developers with a recognized brand and affordable landed houses worth less than Rp 1.5 billion [US$104.3 million].” The Indonesian economy showed slight improvement in the fourth quarter of 2020, when it recorded 2.19 percent contraction on an annual basis after the government eased mobility restrictions. The figure was less severe than the 3.49 percent annual contraction recorded in the third quarter.
Fitch Ratings forecast that economic recovery would drive up the aggregate revenues of rated companies 10 percent year-on-year (yoy) this year to more than Rp 1.6 quadrillion, marking a rebound from the 8 percent annual decline it forecast last year. Property, construction and automotive were among the sectors that were highly impacted last year by the coronavirus pandemic, according to Fitch. Along with mining, oil and gas, the sectors suffered from weak demand and the government’s mobility restrictions. The government and the central bank have tried to stimulate recovery in the three sectors through several fiscal incentives in a bid to encourage spending. For example, Bank Indonesia (BI) cut its rate by 25 basis points (bps) to 3.5 percent, while the government relaxed sales taxes on new cars and lowered down payments for new automotive and property purchases.
The government also inaugurated the country’s sovereign wealth fund, the Indonesia Investment Authority (INA), which focuses on wooing foreign investors to infrastructure projects. Fitch also noted that the government’s move to slash the luxury goods sales tax on sedans and two-wheel drive vehicles of engines less than 1,500 cc and Bank Indonesia’s zero percent down payment policy for vehicle loans were expected to support automotive recovery. “For sectors like auto, we do not expect it to return to the 2019 level in terms of sales,” said Olly. “People tend to remain cautious [in] spending, especially [because] autos are not primary needs.” According to the Association of Indonesian Automotive Manufacturers (Gaikindo), car wholesales were down 34.22 percent yoy to 52,910 vehicles and retail sales down 33.38 percent yoy to 53,997 vehicles in January. Fitch said that while most sectors were expected to improve, the telecommunications, retail and utility sectors as well as related industries were expected to remain stable this year, given their resilience against the pandemic shock last year. Crude palm oil and related sectors were forecast to see a worse outlook for 2021 compared to 2020. The agency also reported that last year’s share of companies with a negative ratings outlook was 25 percent, up by 4 percentage points from 2019, albeit with a stable outlook for most companies. Some investment-grade companies with a negative outlook were publicly listed textile company PT Sri Rejeki Isman (Sritex; SRTX) and state-owned construction company PT Wijaya Karya (WIKA).
The agency estimated last year’s net debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratios for Sritex and Wika at respectively 3.4 and 14. The net debt-to-EBITDA ratio is one way of determining a company’s ability to pay off its debt. “For Indonesia specifically, the risk usually relates more to the industry itself, such as the development in commodity prices or exposure to foreign currencies,” said Olly. Bank Permata economist Josua Pardede said on Monday that government stimulus for certain sectors, particularly the property, construction and automotive sectors, was expected to spur productivity growth in many other industries, given the sectors’ multiplier effect and large labor force. “The intervention of the government, BI and the OJK [Financial Services Authority] via fiscal and monetary stimulus are expected to support some sectors, such as property as well as car manufacturing and sales,” Josua told the Post by text message.
