Indonesia raised to investment grade by S&P on budget curbs

[JAKARTA] S&P Global Ratings raised Indonesia's credit rating to investment grade, bringing it in line with the other two main rating companies and paving the way for more fund inflows into Southeast Asia's largest economy. Stocks surged to a record and the rupiah advanced.

The sovereign rating was lifted to BBB- from BB+ with a stable outlook, S&P said on Friday, citing an improvement in the budget. Both Moody's Investors Service and Fitch Ratings have a positive outlook on their assessments of the nation's debt.

"The government's new focus on realistic budgeting has lowered the risks that budget deficits will widen significantly when government revenue disappoints," S&P said. The upgrade reflects "our assessment of reduced risks to Indonesia's fiscal metrics," it said.

The S&P upgrade comes on the back of a successful tax amnesty that earned the government more than US$11 billion in revenue, helping to ease pressure on the budget and pay for much-needed infrastructure projects. The economy is also being buoyed by a rebound in exports and strong consumer spending.

As Asia's last major economy without a full-investment grade, the higher rating boosts the appeal of the nation's assets. Goldman Sachs Group Inc said in March an upgrade may help attract as much as US$5 billion in funds.

The Jakarta Composite Index jumped as much as 3.2 per cent to a record 5,825.2, extending gains this year to almost 10 per cent. The rupiah rose as much as 0.3 per cent, paring losses of as much as 0.5 per cent earlier and taking gains this year to 1 per cent.

"This is a well-deserved upgrade thanks to its prioritization of fiscal sustainability at the expense of growth in 2016," Trinh Nguyen, senior economist for emerging Asia at Natixis SA in Hong Kong, wrote in a note. Among the benefits of the upgrade include access to a pool of eligible foreign investors that only invest in at least investment-grade rated assets, lowering funding costs, she said.

S&P had been slow to follow Moody's and Fitch in raising the nation's debt to investment grade because of growth concerns and rising bad debts. Momentum in the economy has picked up this year as exports rebounded, with the International Monetary Fund forecasting growth of 5.1 per cent in 2017.

"Obviously, this is about six years ago overdue. Guess S&P finally ran out of excuses." said Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen Asset Management in London. "This will allow for increased Japanese ownership of local-currency bonds."

President Joko Widodo's government cut public spending last year to meet a legal fiscal deficit cap of 3 per cent of gross domestic product and built up foreign exchange reserves to a more than five-year high of US$123 billion.

S&P said controls on spending will probably help to keep the deficit under 2.5 per cent of GDP over the next three to four years. Net government debt will likely be contained well below 30 per cent of GDP, it said.

Bank Indonesia was cited as key in sustaining growth and helping to ease the impact of any economic shocks. The central bank will seek to maintain stability "to support the continuation of structural reforms taken by the government and the development of a sustainable and inclusive economic growth," Governor Agus Martowardojo said in a statement.

The main weakness for Indonesia is its status as a lower middle-income country and its vulnerability to external shocks given the economy's reliance on commodities and foreign inflows, S&P said. While Indonesia has shown "effective policy making" in recent years, it still trails its peers on perceptions of governance and corruption, it said.

"More upgrades are possible, with Fitch and Moody's potentially moving Indonesia up the scale further into investment grade," Wellian Wiranto, an economist at Oversea-Chinese Banking Corp in Singapore, wrote in a note. "All these may be a cause for a raucous celebration, but also quiet reflection. Tough reforms got Indonesia to this point. More is needed to power it further."

BLOOMBERG