One piece of evidence of international confidence in the Indonesian economy is the steady upgrades in the country's credit ratings by international financial services companies such as Standard & Poor's, Fitch Ratings and Moody's. In late 2011, Fitch Ratings was the first to reinstate Indonesia's investment grade status after a 14-year hiatus. In January 2012, Moody’s followed suit citing the country’s resilient economy. S&P may follow soon, depending on the fuel price hike issue.
In the late 1990s, the Asian Financial Crisis ended a prolonged period of robust economic growth fostered by Suharto's authoritarian New Order regime (rezim Orde Baru). The economy collapsed, in particular its financial sector, and needed to be restructured from the bottom up. And - to make matters more complicated - this process was accompanied by the ongoing journey towards becoming a full democracy. Although political reformation has not reached satisfying results yet (but the country does show political stability), financial recovery has been realized and evolved into a quickly expanding economy, driven by domestic consumption, foreign investment, and commodity exports. The latter has lost its significance since the outbreak of the global financial crisis in the late 2000s but is bound to be back on track when global turmoil has eased. The other two seem unstoppable for the moment.
Indonesia has shown good macroeconomic growth in recent years with an annual growth rate of between 6.0 and 6.5 percent. This year, the result is most likely to fall within that range again. Foreign companies realize the potential of Indonesia's rising and increasingly consuming middle class and have been pouring money into the country: foreign direct investment increased 27.2 percent in Q1-2013, foreign purchases of Indonesian stocks in the first four months of 2013 has already outperformed total foreign stock purchases in 2012, and foreign ownership of sovereign bonds (SUNs) has increased 31 percent (YoY) in Q1-2013, while bond yields have gone to historic lows.
Obviously Indonesia also contains a number of risks that can weaken international confidence in the country's financial sector. These include, the weakening IDR rupiah, the widening trade deficit, higher inflation and - connected to the former - tremendously large energy subsidies that distort the economy. Standard & Poor's, the only credit agency of the big three that has not upgraded Indonesia to investment status yet, stated that it will only upgrade Indonesia if the country will seriously reduce the allocated amount of energy subsidies. The Indonesian government is planning to raise the price of subsidized fuel in May. If indeed raised, it will be important to see its impact on the country's inflation figure, and if S&P will upgrade Indonesia to investment status. An upgrade will most likely trigger more capital inflows as a number of funds are limited to invest in investment grade economies only.
Indonesia's Credit Ratings:
BBB– and Baa3 are investment grade statuses
Source: Investor Daily