What Does S&P Rating Upgrade Mean for Indonesia?

Indonesia will be able to access a wider pool of investors after global credit rating agency Standard & Poor's upgraded the country's long-term sovereign credit rating on Friday (19/05), government officials and analysts said. (Reuters Photo/Beawiharta)

By : Tabita Diela | on 11:47 PM May 19, 2017
Category : Business, Economy, Featured

Jakarta. Indonesia will be able to access a wider pool of investors after global credit rating agency Standard & Poor's upgraded the country's long-term sovereign credit rating on Friday (19/05), government officials and analysts said.

Despite recent political turbulence and concern over religious intolerance in the country, the New York-headquartered ratings agency believes the Indonesian government has taken effective measures to stabilize the country's public finances despite a global economic slowdown.

Indonesia's benchmark stock index broke a record on Friday after the rating upgrade announcement in the afternoon.

"A rating upgrade increases our access to international funding in the future," Scenaider Siahaan, strategy and financing portfolio director at the Ministry of Finance, told the Jakarta Globe.

"It's important to note that we won't be recklessly adding new debt. Instead, we will keep improving the way we use the debt," he said.

S&P raised Indonesia's long-term sovereign credit rating to BBB-, or the lowest investment grade just above the junk rating, from BB+ previously.

The agency joins other major debt rating agencies, including Moody's and Fitch Ratings, who have considered Indonesia's sovereign bonds as investment grade for years.

Foreign Direct Investment

Winang Budoyo, chief economist for strategic innovation and performance at Bank Tabungan Negara's management division, said some global pension funds, for example, have so far been unable to invest in Indonesia due to their rules that limit investments in portfolios considered "junk papers," or high-risk, high-return securities.

With all three major global investment ratings agencies having granted the long-awaited investment grade status, those pension funds could now possibly invest in the country.

Josua Pardede, an economist at Bank Permata, said investment-grade status will also allow foreign direct investment, apart from investment in portfolio asset, which will allow sustainable growth for the country eventually.

Gundy Cahyadi, an economist at DBS in Singapore, echoed Josua's sentiment, saying that more foreign direct investment may flow into Indonesia in the coming years.

"Certainly, this assumes that stability remains, growth fundamentals improve and the government's commitment to reforms persists. As far as the markets are concerned, we feel that much of this positive news has been factored in previously. And as such, we may only see a knee-jerk [positive] impact in financial markets," he said.

Bank Indonesia Governor Agus Martowardojo said in a statement that the country welcomes S&P's long-overdue assessment.

"This recognition has confirmed further the acknowledgment by the international community of Indonesia's achievements in maintaining macroeconomic and financial system stability," he said.

The government, Bank Indonesia and the World Bank, all share a positive outlook on the country's economy.

Bank Indonesia expects the economy to grow at between 5 percent and 5.4 percent this year, compared with last year's 5.02 percent, on the back of improving exports and more investment.

That is in line with the government's 5.1 percent growth target as stated in the 2017 state budget.

The World Bank expects Indonesia's economy to grow by 5.2 percent this year, 5.3 percent in 2018 and 5.4 percent in 2019 amid higher commodity prices and accelerated credit growth on the back of looser monetary policy.

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