D

espite a recent deterioration in the country'€™s economic fundamentals, the risk of investing in Indonesia continues to decline, as a more credible policymaking ability has eased short-term concerns and boosted the long-term outlook.

According to data provider S&P Capital IQ, Indonesia'€™s five-year credit-default swaps (CDS), a measurement of investment risk in a country, hit the lowest level in its history of 132.5 last week, before closing at 135 on Friday.

The country has seen a significant decline in its five-year CDS this year, as the indicator stood at 226 at the end of January.

CDS measures the cost of additional premiums that investors have to pay to insure against the risk of default for five years, with higher CDS indicating that a country has a higher investment risk.

'€œLower CDS is good for us as it can lead to lower yields and cheaper borrowing costs when we need to tap the market for funds,'€ said Robert Pakpahan, the Finance Ministry'€™s debt management office head.

He explained that the downward trajectory of CDS showed investors had faith in the policymaking ability of the government and Bank Indonesia (BI), the central bank, to respond to the short-term economic pressures that the country was enduring, such as the widening current-account deficit.

'€œIt'€™s dangerous when you face a problem but do not understand the issue comprehensively,'€ Robert said.

'€œHowever, here we are seen as truly comprehending our problems and the required policy responses, so investors have faith [that we can solve the issues].'€

The declining investment risk in Indonesia came about as the country grappled with an economic slowdown and deterioration in its external health. In the second quarter, Indonesia'€™s gross domestic product (GDP) growth expanded by 5.1 percent, the slowest in almost five years.

In the same period, Indonesia'€™s current-account deficit was still at a relatively high level of US$9.1 billion (4.3 percent of GDP).

Despite recent pressures in the economy, among foreign investors there has been a sense that policy credibility has been enhanced in Jakarta, according to Jan Dehn, the global head of research of UK-based fund manager Ashmore Investment Management.

BI Governor Agus Martowardojo has been aggressive in stabilizing the economy as he raised the key interest rate by 175 basis points throughout last year to 7.5 percent, while Finance Minister Chatib Basri has imposed new tax rates to cut imports and is currently formulating new tax incentives to boost inflows.

'€œMonetary policy is today far more credible than at this time last year, while foreign exchange reserves are 20 percent higher than last year,'€ Dehn said in an email interview from London.