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Jakarta Post

EDITORIAL: Well-deserved rating upgrade

  • EDITORIAL

    The Jakarta Post

Jakarta   /   Tue, May 23, 2017   /   08:23 am
EDITORIAL: Well-deserved rating upgrade Sharing a laugh: Finance Minister Sri Mulyani Indrawati (center) points to one of Goenawan Mohammad's sketches, while the creator (right) and visitors look on. (Komunitas Salihara/Witjak Widhi Cahya)

There is no longer any doubt in the government’s prudent macroeconomic management after Standard & Poor’s last week upgraded the Indonesian sovereign credit rating to investment grade (BBB-) from the previous junk status, following a similar upgrade made by Fitch in late 2011 and Moody’s in early 2012.

The long-awaited upgrade from S&P, the most conservative of the three major rating agencies, completely validates Indonesia’s strong fiscal management that was established by Finance Minister Sri Mulyani Indrawati after she joined President Joko “Jokowi” Widodo’s cabinet in July last year.

The upgrade will build up a stronger confidence on the part of foreign direct and portfolio investors in Indonesia’s outlook on the back of significant improvement in budget discipline, policy making efficacy and predictability and the success of the six-month tax amnesty, which ended last March. Stronger fiscal consolidation under the leadership of Sri Mulyani, as reflected in the more realistic state budget last year, has contributed greatly to strengthen the country’s growth fundamentals.

Sri Mulyani indeed undertook many initiatives to strengthen fiscal management immediately after she took over the Finance Ministry, slashing estimates for both revenues and spending and thereby lending strong credibility to the state budget and significantly reducing the sovereign risks.

She met with the top executives of the three major credit rating agencies in Washington last October on the sidelines of the joint World Bank and International Monetary Fund conferences and briefed them on the latest reforms already implemented to improve macroeconomic management. The S&P’s latest rating is indeed a well-deserved upgrade thanks to Sri Mulyani’s bold, yet painful measures to maintain fiscal sustainability at the expense of growth in 2016.

The government had since the middle of last year pushed for a higher rating from S&P because an investment grade will provide Indonesia with a wider access to foreign direct and portfolio investors, especially institutional investors from Japan, and private equity funds, which shun noninvestment grade countries. As the upgrade also reduces Indonesia’s sovereign risks, the higher rating will reduce the costs of government borrowing from the international financial, notably bond, markets. A sovereign investment grade gives investors insight into the level of economic and political risks associated with investing in Indonesia.

The upgrade should serve as a confidence-building brick for the country’s overall economic management because this is the first time since the 1997 financial crisis that Indonesia’s bonds have been rated investment grade by all three major ratings agencies.

However, we should also remember that the BBB- rating is S&P’s lowest investment grade. This is no time for any complacency. The government should instead continue to move forward confidently to implement more reforms to further strengthen the economic fundamentals. The 15th reform package, which will focus on the logistics industry, is more than four months behind schedule, while inefficient logistics are among the main barriers to direct investment.