Indonesia fails to win full investment grade as S&P holds rank

[JAKARTA] Indonesia's long wait to win full investment grade rank just got longer after S&P Global Ratings maintained its junk status because of weak fiscal performance.

S&P on Wednesday affirmed the country's BB+ rating, while leaving the door open for a future upgrade by maintaining a positive outlook. It cited forecasts for larger budget deficits in coming years and a decline in corporate credit quality. Fitch Ratings and Moody's Investors Service awarded Indonesia investment grade status more than four years ago.

The failure to win to full investment grade status may take the shine off Asia's best-performing bond market, with the nation's local-currency notes gaining about 10 per cent this year, according to indexes compiled by Bloomberg. The S&P report, following a visit by the ratings company to meet President Joko Widodo and his ministers in Jakarta, comes as government revenues fall short of targets because of weak tax collection and low commodity prices.

"While the Indonesian officials may have been hopeful, from the S&P standpoint, the test is in the pudding,'' said Song Seng Wun, an economist at CIMB Private Banking in Singapore. "Indonesia has done a bit more than in previous years to strengthen its fiscal position but S&P may prefer to see a structural shift in its fiscal position, leading to an actual improvement on the revenue collection front.''

To improve revenue, the government is relying on a plan for a tax amnesty to lure funds stashed overseas, yet that bill has been held up by parliament. Bank Indonesia says it will result in as much as 560 trillion rupiah (S$56.5 billion) being repatriated and help boost economic growth to as much as 5.4 per cent this year. The nation's currency has strengthened 0.7 per cent against the dollar in 2016, and the Jakarta Composite Index of shares is up 5.5 per cent.

"The most important thing is to find another breakthrough to ensure that fiscal risk remains safe," said David Sumual, chief economist at PT Bank Central Asia in Jakarta. "The government needs to come out with a more certain solution. The barrier with the tax amnesty plan is political."

Indonesian sovereign bonds fell on Thursday, pushing the two-year yield up four basis points to 7.28 per cent and the 10-year yield up two basis points to 7.88 per cent, as of 10:46 am in Jakarta, according to Inter Dealer Market Association prices.

The rupiah dropped for a fourth day, weakening 0.2 per cent to 13,692 a dollar, prices from local banks show. The Jakarta Composite Index rose 0.2 per cent, although banking stocks dropped, with PT Bank Negara Indonesia declining 1.5 per cent.

"We should be patient," said Scenaider Siahaan, director of debt portfolio and strategy at the Finance Ministry's budget financing and risk management office in Jakarta.

"The outlook remains positive so they will upgrade us eventually. S&P wants to see the result of tax reform in the form of an increase in tax revenue."

Indonesia's Finance Minister Bambang Brodjonegoro said last month that S&P officials were impressed with the government's reform efforts during their trip and State-Owned Enterprises Minister Rini Soemarno said an upgrade was expected in June.

S&P said the positive outlook on its rating reflects the possibility of an improvement if the nation's fiscal performance strengthens, resulting in narrower deficits and borrowings remaining low.

"S&P is considered the more conservative of the three agencies," said Trinh Nguyen, a senior economist at Natixis Asia Ltd in Hong Kong. "Of the three things that S&P asked Indonesia in the last rating action, the sovereign achieved reducing fuel subsidies, allocating its public investment efficiently, but still struggles with macroeconomic balance."

Consumer prices in Indonesia rose at the slowest pace in more than six years in May, providing the central bank with more room to ease monetary policy after three rate cuts in the first quarter. The inflation rate fell to 3.3 per cent from a previously reported 3.6 per cent in April, the statistics agency said Wednesday. South-east Asia's biggest economy grew 4.92 per cent in the first quarter from a year earlier, compared with 5.04 per cent in the previous three months.

"Our GDP was lower than 5% in the first quarter, so I was convinced that the upgrade wouldn't happen as S&P has another reason not to do it," said Handy Yunianto, head of fixed-income research at PT Mandiri Sekuritas, said by phone from Jakarta.

"But in my opinion, the fundamentals have improved, inflation remains low and we're anticipating the tax amnesty coming into effect."

BLOOMBERG