S&P gives Indonesia a good grade

Financial Times, April 8, 2011 4:50 pm by Alexandra Stevenson

Things are looking up for Indonesia.

On Friday, Standard & Poor’s promoted it to within one notch of investment grade, edging the country further away from the perceived line of risky investments where most of its EM peers dwell. The ratings agency upgraded Indonesia’s long-term foreign currency sovereign credit and debt ratings to ‘BB+’ from ‘BB’, with a positive outlook, citing a steadily improving public balance sheet as the main reason.

S&P said it made the move because of Indonesia’s sustained high nominal GDP growth and falling net government debt – down to 24 per cent of GDP in 2010.

S&P’s has so far been the most cautious of the ratings agencies. In January, Moody’s upgraded its Indonesia rating to one notch below investment grade, and Fitch followed suit, upgrading its rating to BB+, in February.

Indonesia’s GDP growth accelerated to 6.1 per cent in 2010, up from 4.5 per cent in 2009, on the back of growing consumer spending, an increase in foreign direct investment and booming trade. In the last quarter of the year the economy surged an annualised 6.9 per cent.

Indonesia’s per capita GDP has doubled to US$3,037 in the six years to 2010, launching the country into the league of middle income countries for the first time. While this represents remarkable growth, its per capita GDP growth is still “signifcantly below” S&P’s median for the ‘BB’ rating category, the ratings agency said.

S&P cited shortfalls in infrastructure, legal uncertainties, corruption and the labour market as potential obstacles for Indonesia in obtaining higher growth.

“A stalling of reforms or the absence of timely and adequate policy responses to renewed fiscal or external pressures would result in the rating stabilizing or weakening,” Agost Benard, S&P credit analyst, said on Friday.

“We may raise the ratings if inflation pressure diminishes, the external debt burden declines, the sovereign’s balance sheet improves, or reforms such as subsidy rationalization suggest that fiscal and external vulnerabilities are further reduced,” he said.

But the country’s accelerated growth has raised inflationary pressure and Bank Indonesia has been criticised for getting behind the curve. Before it raised rates in February – by 25 basis points to 6.75 per cent – Indonesian rates had been at a record low of 6.5 per cent for 18 months.

Full marks to Indonesia for its better grade. Now it needs to keep up with its homework.