After many months of expectation, one of the big three credit rating agencies has finally decided that Indonesia is worthy of an investment-grade rating.
Yesterday, Fitch Ratings beat its rivals, Moody’s Investor Services and Standard & Poor’s, by upgrading Indonesia’s sovereign debt rating to BBB-. The decision was not unexpected — analysts and investors looking for the next big opportunity after the Bric countries of Brazil, Russia, India and China have long anticipated Indonesia’s return to credit market respectability.
The country lost its investment grade status in 1997 in the wake of the Asian financial crisis, but has recently made progress in putting its economy back on track.
“The upgrade reflects the country’s strong and resilient economic growth, low and declining public debt ratios, strengthened external liquidity and a prudent overall macro policy framework,” said Philip McNicholas, director in Fitch’s Asia-Pacific sovereign ratings group.
Analysts at Barclays Capital retain their “base case” that the sovereign will achieve investment grade ratings from at least one of the other agencies in the second half of next year.
Fitch expects the country’s GDP growth to average more than 6% a year until 2013, irrespective of problems elsewhere in the world. “Indonesia’s domestically-oriented economy and success in delivering relatively strong economic growth without the creation of external imbalances, or a reliance on short-term external financing suggests economic growth prospects should prove resilient to external shocks, as was the case in 2008,” said McNicholas.
In addition, low public debt and positive real interest rates give the authorities policy flexibility to respond to any slowdown.
Indonesia has also protected itself by building up foreign exchange reserves. Official reserves reached more than $111.3 billion at the end of November, which has “has insulated domestic economic and financial stability during recent periods of intensified portfolio capital flow volatility”.
Significantly, according to Fitch, the country’s current account balance plus foreign direct investment is projected to remain in surplus. “This mitigates vulnerability to potential short-term capital flow volatility.”
Most of all, Fitch is impressed with Indonesia’s “overall macro policy framework”.
“Tolerance of nominal currency strength within the monetary policy framework, an observed willingness to tighten policy should inflation reach high single-digit rates, and a prudent fiscal policy bolster the case for an upgrade,” said McNicholas.
Indonesia’s gross government debt-to-GDP ratio is expected to fall from 26% at end-2010 to 25% by end-2011, well below the BBB median of 36%. Additionally, the debt/revenue ratio is projected to drop from 168% at end-2010 to near the projected BBB average of 126% by 2012, despite Indonesia’s low revenue take — just 17% of GDP in 2011 against the BBB average of 33%.
The upgrade came despite Fitch’s recognition that Indonesia still suffers from low per capita income and is afflicted by many problems affecting the business climate, including poor physical infrastructure and corruption.
However, it insists that the country’s “structural fundamentals are not the weakest in most of these categories, and these issues do not constrain the rating from the upgrade to BBB”.
Yet, the agency warned that the political environment is becoming “less conducive to reform, suggesting Indonesia’s sovereign credit profile is likely to remain at the weaker end of the BBB range for some time”.
Barclays Capital expects Indonesia to outperform in 2012 against the bank’s US dollar emerging market sovereign index, and has an overweight recommendation on Indonesia credit. But, in the near term, Barclays Capital is cautious on Indonesian bond spreads as it expects volatility to remain elevated. “We think Indonesia will continue to trade as a high beta credit,” said Barclays Capital analysts.
