No Investment Grade Yet but S&P Positive about Indonesia
Global credit rating agency Standard & Poor's (S&P) appreciates the policy reforms that have been conducted by the Indonesian government because these changes lead to more openness as well as to enhanced competitiveness. Apart from cutting costly energy subsidies (and redirecting a large chunk of available funds to infrastructure development) the government also unveiled 12 economic policy packages since September 2015 (while more packages are in the pipeline) that include matters such as tax incentives and deregulation (aimed at boosting investment).
A team of US-based S&P - including Global Head of Sovereign & International Public Finance Guy Deslondes - is in Indonesia to study the nation's new policies and the other latest developments that have occurred in Indonesia. The team also met Indonesian President Joko Widodo on Tuesday (10/05). During this meeting Deslondes said Indonesia is one of the world's emerging markets that shows the strongest commitment to conduct reformations that aim at improving the nation's competitiveness.
At the meeting Widodo explained that one of the ongoing challenges in Indonesia is the issue of land acquisition. This issue has managed to block various infrastructure projects in Southeast Asia's largest economy as local landowners ask for extremely high prices. However, Widodo pointed out that the government is committed to push for infrastructure development and eager to tackle the land acquisition issue through negotiations or - if necessary - in court. Examples of projects that are now under construction (after having been delayed for years) are the Jatigede dam in West Java and the Trans-Java toll road.
However, there also remain problems that need to be solved. S&P stated that it is important that Indonesia's infrastructure development budget is fully and efficiently used on key projects that benefit society as a whole. Furthermore, Indonesia needs to enhance legal certainty (which currently blocks a higher inflow of foreign direct investment). Lastly, the degree of red tape (bureaucracy) in Indonesia is still high and undermines economic growth and efficiency.
In May 2015 S&P revised Indonesia's credit rating outlook from BB+/stable to BB+/positive (implying that the country's status could be raised to investment grade within one year) on the back of greater policy effectiveness and predictability causing expanded fiscal and reserve buffers, hence enhancing the nation's external resilience. A key reason why S&P raised the credit rating outlook was Indonesia's decision to seriously cut the government's energy subsidy budget and increase focus on infrastructure development.
The other key global credit rating agencies have already raised Indonesia's status to investment grade in 2011 (Fitch Ratings) and 2012 (Moody's Investors Service). If S&P will raise Indonesia's credit rating to BBB- it should lead to more investment in Indonesia, for example through the bond and stock markets. Meanwhile, the cost of funds will become cheaper for Indonesia (when it seeks foreign funds through a bond issuance). And, indirectly, a higher credit rating is also expected to lead a larger flow of foreign direct investment (FDI) into Indonesia.
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Source: Investor Daily