Indonesian banks predict they won't outperform their 2013 results

What could be behind this forecast?

According to Fitch, the majority of responses from participants polled at their annual Jakarta credit briefing showed a positive and upbeat view of the economy and business environment in 2014, even with elections due later in the year.

They were asked a series of 11 questions about the Indonesian economy, reform, and developments over the next five years.

Here's more from Fitch:

Two-thirds of respondents rejected the labeling of Indonesia as one of the "fragile five" economies, which concurred with views expressed by Ashley Taylor, a World Bank economist, in his presentation, and remarks in the keynote speeches by Bambang Brodjonegoro, Vice Minister of Finance, Agus Martowardojo, Governor of Bank Indonesia, and Mulya Siregar, Deputy Commissioner, Indonesia Financial Services Authority. There was optimism about the trajectory of the currency following its overall depreciation in 2013, with 92% of the audience believing the currency would either stabilise (50%) or strengthen (42%) from its current level.

As for structural reforms, even though nearly 60% of participants felt that recent regulatory developments would negatively impact investment, a hefty 82% of them felt that Indonesia would continue to make significant progress in reforms over the next five years. About two-thirds of participants were confident that Indonesia would accelerate infrastructure development over the next five years, and 87% believed that corruption and transparency issues would continue to be addressed at the same rate (35%) or a faster rate (52%) over the next five years.

There was more uncertainty about GDP growth. Here, 60% felt that GDP would either grow faster (37%) than in 2013 or remain the same (23%), while 40% felt that GDP growth would continue to slow.

In the banking sector, although nearly 60% of the participants felt that complying with proposed Basel III capital regulations would not prove to be too onerous for Indonesian banks, a similar ratio (58%) felt that Indonesian banks would not outperform their 2013 results in 2014. These views also mirrored points highlighted in Fitch's banking sector presentation at the Credit Briefing.

When asked about bond ownership, the participants overwhelming voted to maintain (17%) or increase (63%) their holdings in the next 12 months, reflecting the mood of optimism in the audience despite a still very uncertain election outcome.

This optimism spilled over into the final question where 71% of participants indicated that they felt that Indonesia (BBB-/Stable) would receive another credit rating upgrade in the next 12-18 months. As all three international ratings agencies currently have a stable outlook on Indonesia's foreign currency ratings, an upgrade in the next 12-18 months would appear unlikely. However, the participants view is more likely to be being driven by the fact that Indonesia currently has two investment grade ratings (Fitch and Moody's) and one sub-investment grade rating (Standard and Poor's).