Indonesia's rising budget deficit in 2016 is caused by an unrealistic revenue target (set by the central government) in combination with weak tax revenue realization. Meanwhile, the country is still highly dependent on (raw) commodity exports and the persistently low commodity prices therefore undermine Indonesia's financial stability. Another rating constraint is Indonesia's curtailed per capita gross domestic product (GDP) at USD $3,600. Slow per capita GDP growth in Indonesia is an indication that the government's policies are yet to deliver prosperity.

Meanwhile, Indonesia's corporate credit quality has declined since late-2014 according to S&P. The quality declined amid falling commodity prices, hence triggering companies' slower revenue growth and falling cash flows, while debt servicing requirements remained high.

S&P left the door open for an upgrade to investment grade status this year or in 2017. However, the Indonesian government will need to improve its fiscal framework, raise quality and efficient spending, curb the budget deficit and reduce government debt.

The other big credit rating agencies already upgraded Indonesia to the investment grade class in 2011 (Fitch Ratings) and 2012 (Moody's Investors Service). In May 2015 S&P revised Indonesia's outlook from stable to positive implying that the nation's credit rating can be promoted to investment grade within one year. S&P decided for the positive outlook citing Indonesia's greater policy effectiveness and predictability. This has caused expanded fiscal and reserve buffers, hence improving the nation's external resilience. A key factor that was well-received by S&P was the decision of the Indonesian government to cut its costly energy subsidies and increase its focus on infrastructure development.

Read more: Credit Ratings Indonesia: Standard & Poor's, Fitch Ratings & Moody's

The investment grade status is important as it would boost investment into the country through portfolio investments (stocks and bonds) and direct investment. It also affects borrowing costs positively for the country. The failure to obtain the investment grade status means that Indonesia misses out on additional inflows of long-term investment funds (these funds are required to overcome the budget deficit and current account deficit). It also takes the shine off Indonesia's bond market, which has been the best-performing bond market so far this year (rupiah-denominated notes raised approximately 10 percent in 2016).

Credit Rating Indonesia:

     Standard & Poor's        Fitch Ratings            Moody's
Rating Outlook Rating Outlook Rating Outlook
Indonesia BB+ Positive BBB- Stable Baa3 Stable

Source: Standard & Poor's