Fitch Ratings-Jakarta/Singapore-25 April 2021: Waning pressure on the operating environment of Indonesia's finance and leasing industry has reduced downside risk for ratings in 2021, says Fitch Ratings. Our March revision of the sector’s operating environment outlook to Stable, from Negative, reflected the reduced threat of significant structural damage from the coronavirus pandemic.
We revised our outlook on the sector’s operating environment to negative in April 2020 due to our expectations of pressure on industry growth, asset quality and profitability from the pandemic. We still expect these headwinds to remain until the pandemic is fully contained. However, we believe the risk of significant stress for most rated entities has abated, with authorities prioritising economic stability while working to curb the spread of the virus. Social distancing rules implemented from late 2020 have been more limited relative to those at the beginning of the pandemic, helping to soften the economic impact.
The extension of regulatory loan forbearance measures till April 2022 provides further flexibility for the industry to manage borrower stress. This has been a popular programme, with more than 35% of industry receivables having been restructured by end-2020. Such receivables could lead to an asset impairment overhang if left to deteriorate. However, indications from many larger Fitch-rated entities suggest that a majority of restructured loans have returned to normal repayment schedules over the past few months. We expect some fluctuation in repayment rates as coronavirus infection numbers and corresponding restrictions continue to evolve, but the overall trend points to improved borrower confidence, recovering repayment capacity and lender discipline in resolving problem loans.
We believe sectoral profitability will benefit from provisioning buffers booked in 2020, which reached 7% of total gross loans (2016-2019 average: 3%). The industry remained profitable despite the provisioning spike, with pre-tax income/average assets of 2% (2019: 5%). The bulk of the industry’s assets are held by lenders with stronger parent companies, mostly banks and automotive principles, which should continue to underpin the sector’s funding stability.
The operating environment factor is a key rating input under Fitch’s criteria for non-bank financial institutions, which includes finance and leasing companies. Our stable outlook for the factor – along with an improvement in other key metrics – helped drive the March Outlook revision on the National Long-Term Rating of independent financier, PT BFI Finance Indonesia Tbk (A+(idn)), to Stable, from Negative.
We expect the operating environment to remain subject to downside risk until the pandemic is contained. Social distancing measures may continue to dampen economic activity, while the imposition of strict lockdown measures that threaten to disrupt Indonesia's economic recovery could prompt renewed negative action on the operating environment factor. However, this is not our base case.
We project 2021 GDP growth of 5.3% for Indonesia, supported by government stimulus and net exports, consistent with a gradual normalisation in operating conditions for much of the economy. A vaccination rollout since January 2021 may improve domestic sentiment and, while recent government auto incentives may have only a transient impact on financing demand, any recovery in underlying purchasing power and consumer sentiment should support more sustainable growth.
