Indonesia Raised to Investment Grade by S&P on Budget Curbs

May 19, 2017 — Eye on the Market

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 upgrade may boost the appeal of Indonesian assets among conservative Japanese institutional investors and help attract as much as $5 billion in funds, Goldman Sachs Group Inc. said in March.

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

“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, said 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 percent in 2017.

Tax Amnesty

The S&P upgrade comes on the back of a successful tax amnesty that earned the government more than $11 billion in revenue, helping to ease pressure on the budget and pay for much-needed infrastructure projects. President Joko Widodo’s government cut public spending last year to meet a legal fiscal deficit cap of 3 percent of Gross Domestic Product and built up foreign exchange reserves to a more than five-year high of $123 billion.

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

“Despite the broader vulnerabilities of the economy to external shocks, we consider strong public finances a cornerstone of our investment-grade rating on Indonesia,” S&P said.

Source: https://www.bloomberg.com/news/articles/2017-05-19/s-p-upgrades-indonesia-to-investment-grade-amid-stronger-growth