This is a great day for Indonesia's financial markets. Global credit rating agency Standard & Poor's (S&P) assigned investment grade status to Indonesia's sovereign rating, upgrading it from junk status, hence now being on par with the investment grade rating as assigned by the other leading credit rating agencies Fitch Ratings and Moody's Investors Service. The investment grade status from all three leading credit rating agencies should unlock a fresh flow of capital into Indonesia.
Various big institutional investors are only allowed to invest their funds in those countries that obtained investment grade ratings from all three key global credit ratings agencies. Thus, we can expect to see a big inflow into Indonesian stocks and bonds. This was already visible on Friday afternoon (19/05) when - just after S&P announced the credit rating upgrade - Indonesia's benchmark Jakarta Composite Index surged 2.59 percent to close at 5,791.88 points, an all-time record high, while the Indonesian rupiah appreciated 0.23 percent to IDR 13,325 per US dollar (after having touched IDR 13,400 per US dollar in morning trade).
On Friday S&P announced it has lifted Indonesia's sovereign rating from BB+ to BBB- (with a stable outlook), citing an improvement in the nation's budget and reduced risks to Indonesia’s fiscal metrics. According to the S&P statement, the Indonesian government has recently been focusing on realistic budgeting and this has reduced the risk of widening budget deficits in times of disappointing government revenue collection.
Scenaider Siahaan, Strategy and Financing Portfolio Director at Indonesia's Finance Ministry, said the government will not recklessly add new debt despite access to international funding has been widened. The ratings upgrade is also expected to lead to more foreign appetite for direct investment in Indonesia.
About two months ago, in March 2017, American finance firm Goldman Sachs Group Inc made a statement it expects a big flow of funds from Japan (particularly the nation's conservative institutional investors) entering Indonesia's capital markets when credit rating agency S&P decides to upgrade Indonesia's sovereign debt rating to investment grade. Indonesia is attractive as it can now be regarded one of the highest-yielding investment grade markets in the world.
The Indonesian government should be complimented for finally making realistic budgets (possible Finance Minister Sri Mulyani Indrawati played a major role) that led to this ratings upgrade. The government had also initiated a successful tax amnesty program between July 2016 and March 2017.
Revenue generated through the tax amnesty program and the public spending cuts that were undertaken in 2016 made sure the 2016 budget deficit would not exceed the legal nation's fiscal deficit cap of 3 percent of gross domestic product (GDP). S&P sees Indonesia's budget deficit below 2.5 percent of GDP in the next four years on the back of controlled government spending.
Earlier S&P - known as the most conservative among the three key rating agencies - had been reluctant to upgrade Indonesia to investment grade status as it was concerned about rising budget deficits in the years ahead (partly due to bleak tax revenue realization), the decline in Indonesia's corporate credit quality, the high dependence of Indonesia on (raw) commodity exports, bleak per capita gross domestic product (GDP) at USD $3,600, and concern about the nation's banking sector.
Credit Rating Indonesia:
|Standard & Poor's||Fitch Ratings||Moody's|