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Slow reforms cost RI chance to win rating upgrade
Indonesia will have to wait at least another year to receive an investment grade from Standard and Poorâs (S&P), after the financial rating company decided on Thursday to revise its rating outlook on the countryâs economy to stable from positive
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ndonesia will have to wait at least another year to receive an investment grade from Standard and Poor's (S&P), after the financial rating company decided on Thursday to revise its rating outlook on the country's economy to stable from positive.
S&P said the change diminished the chance for Indonesia to receive an investment grade.
'The outlook revision to stable reflects our assessment that the stalling of reform momentum and a weaker external profile have diminished the potential for a rating upgrade over the next 12 months,' S&P said in a statement.
Former finance minister Agus Martowardojo had said that with Indonesia's strong economic growth and the improvement of its economic macro indicators, S&P would this year raise its rating on Indonesia to an investment grade.
Unlike the other two major rating companies, Moody's Investors Service and Fitch Ratings, S&P still rated Indonesia one notch below investment grade. Moody's and Fitch upgraded their ratings on Indonesia to investment grade in December 2011 and January 2012, respectively.
Attaining an investment grade indicates a country's low risk investment climate and strong financial capacity to fulfill financial commitments.
In line with the revision of the rating outlook, S&P on Thursday also affirmed its 'BB+' long term and 'B' short term sovereign credit ratings, as well as its 'axBBB+/axA-2' ASEAN regional scale rating on Indonesia. The rating agency said the sovereign rating on Indonesia reflected the economy's low per capita income, still-developing structural and institutional foundations, weak policy environment and a high, increasing external leverage.
In contrast, the Philippines overtook Indonesia to secure an investment grade from S&P, which upgraded its rating on the country's long-term, foreign currency-denominated debt one level to 'BBB-' from 'BB+', with a stable outlook.
At a projected US$3,800 in 2013, Indonesia's per capita gross domestic product (GDP) was relatively low in the rating category. This was despite a decade of moderately strong growth when real per capita GDP rose at an average of 4.7 percent per year.
'We believe that at this income level, Indonesia has a limited ability, relative to wealthier peers, to ensure policy flexibility,' S&P credit analyst Agost Benard said. 'The government also has less room to maneuver, when maintaining credit worthiness would require unpopular polices.'
S&P indicated that slow progress in improving critical infrastructure, along with legal and regulatory uncertainties and bureaucratic obstacles, detracted from Indonesia's growth potential. These factors delayed poverty reduction and economic development.
Purbaya Yudhi Sadewa, the head of Danareksa Research Institute, said that slow progress in infrastructure development was one of the main reasons why S&P had revised the Indonesian rating outlook from positive to stable.
With the rating change, Indonesia would have to wait longer to achieve an investment grade from S&P, Yudhi said, but he added that the delay would not affect foreign investors' confidence in Indonesia.
Yudhi said he was surprised by the rating company's decision to give a higher grade to the Philippines. Although the Philippines' government was more serious about developing the country's infrastructure, with a relatively less stable political and security climate, the country did not deserve a higher rating, he said.
The impact of the revision in the rating outlook would not have a serious impact on foreign confidence because Moody's and Fitch would unlikely follow suit, he went on.
Meanwhile, Bank Mandiri chief economist Destry Damayanti said that S&P's decision to lower its rating outlook on Indonesia highlighted its concerns about Indonesia's costly fuel subsidy and poor infrastructure.
She said the Philippines deserved a higher rating than Indonesia because the former's economy had continued to improve in recent years.
'The country is volatile in terms of domestic politics, but it is economically more stable now and I think economic factors are much more important for S&P,' Destry said. (koi)
