International financial services company Standard & Poor's (S&P) downgraded its outlook on Indonesia’s BB+ rating from positive to stable as the agency assessed that Indonesia's reform momentum is fading and the external profile is weakening. The decision came as a surprise as Indonesia's government had just declared to reduce its massive spending on fuel subsidies starting from next month. These subsidies were the main reason why S&P had not upgraded Indonesia's credit rating to investment grade yet.
S&P is the only credit rating agency out of the big three that has not awarded the investment grade status to Indonesia. The lower outlook to stable (instead of positive) implies that it will take at least 12 months before Indonesia can receive the investment grade status from S&P. In fact, if Indonesia's plan to cut fuel subsidies in June is not realized, the credit rating agency might downgrade Indonesia again. The agency is concerned that massive fuel subsidies are a threat to the fiscal state of the country and that external pressures due to global economic uncertainty are not responded to adequately and in a timely manner. S&P had given the BB+ rating with a positive outlook since February 2006.
Indonesia's government allocated IDR 193.8 trillion (USD $20.0 billion) for fuel subsidies from 2013's state budget (as such fuel subsidies make up 61 percent of the total amount spent on subsidies).
The agency stated that private Indonesian companies had assembled a large amount of foreign debt and that the government's budget deficit can not be covered by the inflow of foreign direct investments (FDIs). Debt of private Indonesian companies has doubled in the last six years (triggered by low interest rates in foreign countries). Indonesia's public debt, on the other hand, is safe. This year, it will probably fall to 22 percent of the country's gross domestic product (GDP).
Analysts believe that after the price of subsidized fuel is raised in June, S&P will upgrade Indonesia's status again. The cut in massive fuel subsidies is also believed to restore confidence in the IDR rupiah which has weakened steadily compared to the US dollar.
The downgrade also contributed to the recent fall of the Indonesia Stock Index (IHSG). Yesterday (02/05/13), the index lost 1.32 percent. On today's trading day, it fell 1.37 percent.