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Jakarta Post

Another upgrade well deserved

  • Editorial Board

    The Jakarta Post

Jakarta   /   Tue, June 11, 2019   /   09:03 am
Another upgrade well deserved Pedestrians walk past Standard Chartered signage in the Central district of Hong Kong on Aug. 2, 2017. (Agence France-Presse/Isaac Lawrence)

Rating agency Standard & Poor’s (S&P) upgraded Indonesia’s sovereign credit rating late last month from BBB minus, the lowest rank of its investment grade classification, to BBB, citing strong economic growth prospects, stable policy and a prudent fiscal framework as the main factors in its latest assessment.

The upgrade is quite significant and a boost to investor confidence in Indonesia because S&P has so far been considered the most conservative and demanding among the three big credit rating agencies. The other two agencies, Fitch and Moody’s, have yet to announce their latest assessments.

S&P’s decision on the long-term credit rating upgrade also means a full endorsement of President Joko “Jokowi” Widodo’s second term, despite opponent candidate Prabowo Subianto’s challenge of the election results at the Constitutional Court. Virtually all political analysts say it would be highly unlikely for Prabowo to significantly change the results of the election, which Jokowi won with 55.5 percent of the vote, or a margin of over 16 million votes.

The rating upgrade, made amid increasing uncertainty about the global economy and risks of rising protectionist trends as a result of the escalating United States-China trade war, effectively means S&P expects Indonesia to be very resilient against external threats.

Further down the line, this means lower borrowing costs for the Indonesian government and corporations and more foreign capital inflows to spur growth and improve the country’s external balance position. Indonesia, Southeast Asia’s largest economy, will become more attractive, bringing in foreign portfolio and direct investments.

The agency, however, cautioned against complacency, as the rating might fall if economic growth slows substantially over the next two years, or if there is a notable weakening of Indonesia’s external or fiscal positions. Indications of pressure on the rating are net general government debt exceeding 30 percent and a budget deficit surpassing 3 percent of gross domestic product (GDP) or interest costs exceeding 10 percent of government revenues.

S&P commended the Indonesian economy, which has steadily been growing faster than its global peers. The country’s real GDP per capita income grew 4.1 percent on a 10-year weighted-average basis, compared with an average of 2.2 percent in other emerging economies.

The upgrade is certainly the result of consistently constructive policies, which have created economic dynamism despite the challenging external environment over the past few years. Jokowi’s reelection will surely maintain such policy consistency over the next five years.

More encouraging is that, since Jokowi’s next term will be his last, he will not bear the burdens of a reelection or the rigors of the five-year political cycle, and because his coalition will control the House of Representatives, he is more likely to launch bolder, though painful, reforms that are absolutely critical to sustaining development in the long run.

Jokowi himself has repeatedly pledged to accelerate structural reform and will continue to prioritize the development of physical infrastructure and human resources while working toward reducing the wide income gap.