'Political considerations related to next year's legislative and presidential elections increasingly appear to shape policy formulation. This weakening policy environment may ultimately have a negative impact on growth prospects and the generally sound economic conditions.'

S&P also reported that the Philippines overtook Indonesia to win an improved investment grade following success in reforming government finances and encouraging growth.

The rating on the Philippines' long-term foreign debt was raised one level to BBB- from BB+ with a stable outlook while Indonesia's was cut to BB+ stable from BB+ positive.

S&P ratings are on a scale from AAA to D. Intermediate ratings are assigned at each level between AA and CCC. BBB and above falls within investment grade while BB to D is non-investment grade, carrying higher risks for investors.

Non-investment grade, or junk, will generate higher borrowing costs for the government when it needs to raise foreign-denominated debt.

BB rating means the country is less vulnerable in the near term than other lower-rated states, but there are major ongoing uncertainties and exposure to adverse business, financial and economic conditions, which could lead to an inadequate capacity to meet financial commitments.

Following the cut, Bloomberg reported the most significant fall in the Jakarta stocks for about six weeks of 1.2 percent. Government bonds declined, with the 10-year yield reaching a three-week high, while Rupiah forwards completed the worst day's trading since January.

S&P refused to follow two other major rating firms, Fitch Ratings Ltd. and Moody's Investors Services, when they assigned in 2011 and 2012, respectively, the country's first investment grade in 14 years.

In response to the rating cut, Investment Coordinating Board (BKPM) chairman Chatib Basri said the revision would not significantly affect the investment climate since the market perceived Indonesia differently from rating agencies.

'How else can we explain the 30 percent jump in our foreign direct investment during the first quarter of the year? Our stock market index also recently passed the 5,000 psychological barrier,' he said.

He added that despite the impediments, businesspeople would still look for a place that could offer high returns. 'Indonesia is still the least unattractive country in terms of investment with annual economic growth of 6 percent,' said Chatib.

Chatib's optimism may also be founded on recent reports on consumer confidence. Indonesia's economic growth has been substantially driven by domestic consumption.

According to Nielsen in its first quarter global consumer confidence survey released on Thursday, Indonesians are the most confident consumers in the world with an index of 122, exceeding optimism in India, the Philippines, Thailand and Brazil.

Nielsen Indonesia managing director Catherine Eddy said that the rise in confidence was driven by a sense of optimism towards the impending presidential election and the increase in the minimum wage.

'With the approaching the presidential election, everyone is optimistic about an improvement. This is something that happens consistently in these circumstances,' Catherine said.

Nielsen's survey took place from Feb. 18 to March 8 and involved more than 29,000 online respondents in 58 countries.

The survey gives extra weight to similar indications in the central bank's consumer confidence index, where consumers remained optimistic towards job availability and income for the next six months. (koi)

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