Global rating agency Standard & Poor's has raised Indonesia's sovereign credit rating by a notch on Friday, just a week after the re-election of reform-minded President Joko 'Jokowi' Widodo. (Antara Photo/M Risyal Hidayat)

S&P Upgrade Is All About Jokowi; Prabowo Just a Footnote

MAY 31, 2019

Jakarta. Global rating agency Standard & Poor's has raised Indonesia's sovereign credit rating by a notch on Friday, just a week after the re-election of reform-minded President Joko "Jokowi" Widodo. 

The agency raised the country's debt rating to BBB from BBB-, following in the footsteps of the two other major rating agencies, Moody's Investment Service and Fitch Ratings, which had already placed Indonesia a notch above investment grade.

A higher sovereign credit rating could allow Southeast Asia's largest economy to borrow at lower interest rates from global financial markets.

The Indonesia Stock Exchange (IDX) closed 1.7 percent higher after the news on Friday, ending the week at the highest level in three weeks. The 10-year government bond yield, which moves inversely to price, fell to 8.1442 percent from 8.2177 percent, according to data from the Indonesia Bond Pricing Agency 

S&P said the rating reflects Indonesia's strong growth prospects, which the agency expects "to remain following the re-election of Joko Widodo recently."

The General Elections Commission (KPU) announced last week that Jokowi had won the April 17 presidential election with 55.5 percent of the vote. Rival Prabowo Subianto has challenged the result in the Constitutional Court, alleging massive fraud, but has so far failed to provide credible evidence of such. 

"Although this dispute and isolated pockets of unrest associated with it add some uncertainty to Indonesia's political settings over the near term, we do not expect it to have a material impact on the long-term policy environment or economic outlook," S&P said.

Police suspect last week's post-election riots, which left eight people dead, were orchestrated and they are currently looking for the masterminds.

S&P said Indonesia's economy is growing faster than those of its peers, having clocked per-capita economic growth of 4.1 percent on a weighted-average basis, compared with 2.2 percent for other countries at a similar income level.

The agency said this reflects the government's effective policies to promote sustainable public finances and balanced economic growth, amid repeated global economic turmoil in recent years. The agency expects Jokowi to continue with these policies.

Dian Ayu Yustika, an economist at Bank Danamon Indonesia, said the Jokowi administration would likely follow up on its infrastructure push with a focus on human resources development in the first period.

"[That] means improving the health and education systems and pushing for more vocational training," Dian said.

"Infrastructure will still be on the table, though this year's focus should be more in the form of soft infrastructure, i.e. land reform, alignment of local government regulations and also a review of labor regulations, as these areas are key challenges in attracting much-needed [export-oriented] foreign direct investment," she said.

Bank Indonesia Governor Perry Warjiyo has welcomed S&P's assessment, saying that it was a reflection of a high level of confidence in the country's economic prospects, on the back of its robust monetary and fiscal policy coordination. 

"Going forward, Bank Indonesia and the government remain committed to continuing structural reforms to achieve strong, sustainable, balanced and inclusive economic growth," Perry said. 

The rating agency said Indonesia's public debt level remains comfortably below 30 percent of gross domestic product and that it is projected to remain stable over the next few years. The central bank has also been proactive in its policy rate, the agency said.

Bank Indonesia raised its benchmark interest rate by a total of 175 basis points over the past year, which helped the country to manage risks stemming from vulnerabilities in its current-account balance. 

S&P said Indonesia does not face the extraordinary risk to finance its external deficits and may continue to access markets and foreign direct investment, even during periods of acute external volatility.

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