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Indonesia wins S&P upgrade as Jokowi victory fuels growth bets

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The ratings company said Mr Joko's election win and increased majority will ensure policy continuity over the next five years.

Jakarta

INDONESIA won a sovereign rating upgrade from S&P Global Ratings for its "strong economic growth prospects" and prudent fiscal policy, brightened by the re-election of President Joko Widodo. The nation's currency, stocks and bonds rallied.

The rating was increased to BBB from BBB- and put on a stable outlook, S&P said in a statement on Friday. The long-term rating may be raised again if Indonesia's external settings improve materially from their current levels, or if its fiscal settings improve over the next two years, it said.

"We raised the ratings to reflect Indonesia's strong economic growth prospects and supportive policy dynamics, which we expect to remain following the re-election of President Joko Widodo recently," S&P said. "The sovereign ratings on Indonesia continue to be supported by the government's relatively low debt and its moderate fiscal performance."

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The rating upgrade will be a shot in the arm for Mr Joko, known as Jokowi, who's pledged to bolster growth and expand an ambitious infrastructure drive that's estimated to cost more than US$400 billion in his second term. It puts Indonesia at the same level as Hungary and Uruguay, but a notch below the Philippines, which won an upgrade from S&P last month.

"The upgrade validates our view that Indonesia's fundamentals are sound and reform prospects remain good after the elections," said Euben Paracuelles, an economist at Nomura Holdings Inc in Singapore.

"The only element of surprise here was that S&P had a 'stable' outlook and hence they skipped changing to 'positive' outlook first before upgrading, so arguably this is an earlier-than-expected upgrade."

Investors cheered the surprise rating upgrade with the rupiah jumping as much as one per cent against the US dollar, its biggest gain since Jan 31. While the yield on benchmark 10-year government bonds fell nine basis points to 7.96 per cent, the benchmark stock index surged 1.7 per cent to close at its highest level since May 10.

Indonesia won investment grade rating from all the top rating companies for the first time in two decades in Mr Joko's first term as his government reined in the country's fiscal deficit and accelerated efforts to increase its tax-to-GDP ratio even as it raised government spending to a record to support growth.

South-east Asia's largest economy has been growing at about 5 per cent despite significant headwinds, including last year's emerging market rout. The government is estimating growth next year of 5.3-5.6 per cent even amid a deepening trade war between the US and China and as global demand wanes. Finance Minister Sri Mulyani Indrawati trimmed the budget deficit to 1.79 per cent of GDP last year, the smallest shortfall since 2011, official data shows.

"The Indonesian economy is growing faster than global peers at a similar level of income. This reflects the government's policymaking has been effective in promoting sustainable public finances and balanced economic growth," S&P said.

The ratings company said Mr Joko's election win and increased majority will ensure policy continuity over the next five years. A court challenge of the presidential vote was unlikely to affect the long-term policy environment in Indonesia, S&P said.

The incumbent won about 55 per cent of votes in the April 17 presidential election and political parties in his coalition have won a comfortable majority in the parliamentary elections. Mr Joko's challenger Prabowo Subianto continues to dispute the outcome and has launched legal action in the Constitutional Court, with a decision expected to be announced June 28.

"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.

The rating upgrade will be a boost for Indonesia's efforts to attract much-needed foreign investment, according to David Sumual, chief economist of PT Bank Central Asia in Jakarta. "I expect the upgrade will also allow wider pool of investors, especially FDI," Mr Sumual said. "The key for Indonesia is that achieving its growth potential of more than 5.5 per cent will only happen by inviting more FDI in the coming years." BLOOMBERG