Benefits on the card, but risks remain: Moody’s

Indonesian companies will benefit from the recent upgrade to investment status by Moody’s Investors Service, but risks remain clouding over, especially for infrastructure, policy uncertainties and corporate governance, the rating agency says.

Moody’s in December last year upgraded Indonesia’s sovereign credit rating to an investment grade of Baa3 from Ba1, resulting in lifts for two companies and nine banks ratings to the zone of investment status.

The upgrades would indirectly buoy foreign direct investment (FDI) and permit open the door for new investors to pump in their funds to Indonesia’s capital market, Moody’s vice president and senior credit officer Alan Greene said in a visiting press briefing in Jakarta recently.

He did not specify on the FDI increment Indonesia could attain, but Trade Minister Gita Wirjawan, who is also chairman for the country’s Investment Coordinating Board (BKPM), previously stated that a rating upgrade would increase FDI by at least 1 percent of the gross domestic product (GDP) — equal to a US$9 billion rise compared to the previous level.

In 2011 alone, FDI in Indonesia surged by 18.4 percent to US$19.28 billion.

“But many emerging market factors remain — weak infrastructure, policy uncertainties, corporate governance, etc.,” Greene said in a presentation material distributed during his visit together with Moody’s analysts.

Infrastructure problems, including bottlenecked roads, overcapacity ports and spotty-electricity supply, has persistently been the source of lament by many businesses operating in the country.

The Central Statistics Agency recently reported that Java Island is still the country’s primary growth engine, contributing 57.5 percent to GDP growth in 2011. The over-reliance on Java stems from infrastructure disparities between the islands.

Greene also reminded for Indonesian companies to remain wary of pitfalls.

“Some Indonesian corporates already meet investment grade financial criteria, but relative to Moody’s methodologies there is often a weakest link,” he added, citing lack of diversification in markets and products, as well as single site operations as some of the weak links for Indonesian businesses.

Greene cited state-run PT Semen Gresik Tbk (SMGR), the country’s largest cement maker, as an example of the companies in need to diversify their markets and products, as well as add more operational sites to grow the business more prudently as risks are spread and not centered.

Other weak spots comprise: negative cash flow despite good margins, weak liquidity and lumpy debt maturities. Government policy or regulatory risks, investment execution risks, financial flexibility, dividend policy, unsecured borrowing are also among the things that Indonesian companies should watch closely.

Greene also said that the sovereign upgrade would spell new investment opportunities as portfolios previously deemed as lackluster would now be fit for fund injections, including big conservative funds in major portfolio investors countries like the United States.

Ratings could either move up or down in the future, Greene said. “For positive outlooks, we say that there’s a 30 percent chance for upgrades within the 18-month time frame,” he added, referring to utility firm PT Ciakrang Listrindo and coal miner PT Indika Energy Tbk.

PT Perusahaan Listrik Negara (PLN) and PT Pertamina are among the companies upgraded by Moody’s to Baa3 with stable outlooks, while the banks having been upgraded are PT Bank Central Asia Tbk, PT Bank Mandiri, PT Bank Rakyat Indonesia, PT Bank CIMB Niaga Tbk, PT Bank Danamon Tbk, PT Bank Permata Tbk among others.

Finance Minister Agus Martowardojo has higher hopes that capitals will not only pour into the capital market, but also for infrastructure projects and manufacturing industries to speed up economic growth.