13 February 2020 (closed)
USD/IDR (13,707) +28.00 +0.20%
EUR/IDR (14,853) -19.58 -0.13%
Jakarta Composite Index (5,871.95) -41.13 -0.70%
Slowly but surely Indonesia is obtaining the investment grade rating from the world's three key credit rating agencies. Fitch Ratings already reinstated Indonesia's investment grade rating in 2011, a step that was followed by Moody's Investors Service in 2012. Although Standard & Poor's (S&P) has been more careful, there emerged speculation that S&P will assign the investment grade status to Indonesia soon (perhaps in June 2016). Last week, a S&P team visited Indonesia - to study the country's latest policy reforms and developments - and signaled that its assessment is positive.
Indonesian policy makers and investors are eagerly awaiting the moment that S&P will assign the investment grade status to Indonesia because this move should is expected to rise to more investment into Southeast Asia's largest economy (through portfolio investments, such as stocks and bonds, as well as direct investment). The last time S&P assigned the investment grade rating to Indonesia was back in 1997 just before the Asian Financial Crisis started to ignite (S&P soon downgraded the nation's sovereign credit rating from BBB- to BB+ in late 1997).
In May 2015, S&P affirmed Indonesia's BB+ credit rating but changed the outlook from stable to positive due to improved policy effectiveness and predictability. This improvement had resulted in expanded fiscal and reserve buffers and contributed to Indonesia's improved external resilience. A particular positive point was that Indonesian President Joko Widodo had begun to curb costly energy subsidies (and redirected these funds to productive investment targets such as infrastructure development).
Now, one year later, S&P confirmed its positive assessment regarding the policy reforms that have been conducted by the Indonesian government as these reforms have lead to more openness as well as to the country's enhanced competitiveness. The S&P team that visited Jakarta said this positive assessment came on the back of the further reduction in energy subsidies (combined with a bigger focus on infrastructure development) and the 12 economic policy packages that have been released over the last eight months (these packages aim to boost overall economic growth by improving the investment climate, improve people's purchasing power, and strengthen the competitiveness of local industries). However, S&P emphasized that it wants to see an improvement in effective, quality public spending (although it refrained from giving specific guidelines to improve public spending).
However, regional peers already obtained the investment grade status from S&P. For example, Singapore (AAA/stable), Malaysia (A-/stable), Thailand (BBB+/stable) and the Philippines (BBB/stable), while Indonesia's rating is currently still at BB-/positive. Generally, a rating below BBB is given to countries that are considered vulnerable to external shocks due to weakish fiscal and monetary conditions. Although Indonesia's debt-to-GDP ratio is healthy (around 27 percent of GDP), massive capital outflows occurred when in mid-2013 the Federal Reserve hinted at the winding down of its generous quantitative easing program. The rupiah was one of the major victims, depreciating from IDR 9,400 per US dollar in May 2013 to IDR 14,600 in October 2015, hence giving a high degree of uncertainty to investors.
Meanwhile, with the Indonesian economy heavily relying on raw commodity exports, persistently low commodity prices - amid the bleak global economy - imply that Indonesia has been generating few foreign exchange earnings. The Indonesian economy is primarily supported by household consumption, not by a domestic production surplus that can be exported abroad. With low quality human resources and the nation's low competitiveness - as well as the lack of a well developed manufacturing industry - the structure of the economy is still in need of reform.
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Source: Investor Daily