Although acknowledging it is too early to measure the repercussion of the eurozone’s credit rating downgrades, the Indonesian government argues that at least for now its impact on the country’s economy would be minimal.
Finance Minister Agus Martowardojo said the downgrades, carried out by Standard & Poor’s (S&P) on nine European economies, confirms that the eurozone crisis is turning from bad to worse, a notion that has already been widely anticipated by investors.
“The downgrade implies that situations could worsen and this will affect other countries outside Europe, including Indonesia. So, we have to continue our structural and financial reforms to maintain the global trust in Indonesia,” Agus told reporters at his office on Monday.
With global financial markets shrouded with great uncertainty, it is crucial to keep a close watch on how investors would react to future developments in Europe, Agus said.
“They [investors] could decide to maintain or to reduce their investment portfolio. Perhaps they would also demand more premiums due to heavier risks, shorter maturity periods and higher yields. All of these could potentially take place so we must remain alert,” he added.
S&P cut both France and Austria’s AAA rating by one level to AA+ on Jan. 13, citing the impact of deepening political, financial and monetary problems within the eurozone. The rating company also lowered ratings for Spain, Italy and Portugal by two levels.
Analysts said global investors largely ignored S&P last August when it cut the US rating to AA+ and indicated it was likely to respond similarly to the eurozone downgrades. The only difference in the situation, they say, is that it is easier for the US to print money, thus making them better able to pay off debts, while it is more difficult for
European economies due to their monetary union.
Investor sentiment on Indonesian securities have also remained bullish, according to Finance Ministry debt management chief Rahmat Waluyanto.
“In the short term, there will be no significant effect because markets, both global and local, have anticipated the downgrade before it took place,” Rahmat said.
Rahmat also said that Indonesia’s state securities (SBN) market had also shown its resiliency against the effect of the downgrade.
“When the French finance minister announced the downgrade, foreign investors bought Rp 2 trillion of SBN in one day,” he said.
“So, the European crisis still drives foreign investors to buy Indonesian bonds because they are concerned about having good credit,” he added.
Rahmat, however, warned that if the European crisis continued to worsen, the country would gradually feel more significant impacts.
“If the crisis affected China, one of the closest trading partners of European countries, then this could greatly affect Indonesia due to the fact that we have a large amount of exports to that country,” he said.
“We have prepared a crisis management protocol to prepare for the worst so we can determine what to do during any crisis situation. The government has also prepared a bond stabilization framework to determine sources of funds for market operations,” he added.
The recent downgrades have increased worries within the global market over the European countries’ ability to drive themselves out of a crisis that was triggered by a series of sovereign debt crises.
Greece, for example, is facing possible default due to the stalemate between its government and private bondholders to reach an agreement on cutting the country’s debt. A deal on that matter is essential because Greece will have to cover a large amount of bonds in March.
Greek officials will reconvene with creditors on Jan. 18 after discussions stalled last week and governments elsewhere are preparing for a Jan. 30 summit as the European Central Bank warns against “watering down” a revamp of budget laws.
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