Indonesia Receives Investment-Grade Rating From S&P

Global credit rating agency Standard & Poor's has granted a long-awaited investment grade status to Indonesia's sovereign bonds, praising the country's ability to reduce risks in its public finances, the rating agency said in a statement on Friday (18/05). (Antara Photo/Reno Esnir)

By : Dion Bisara | on 4:56 PM May 19, 2017
Category : Business, Economy, Featured

Jakarta. Global credit rating agency Standard & Poor's has granted a long-awaited investment grade status to Indonesia's sovereign bonds, praising the country's ability to reduce risks in its public finances, the rating agency said in a statement on Friday (18/05).

The debt rating agency raised Indonesia's long-term sovereign credit rating to BBB-, the lowest investment grade tier, from BB+. S&P was the last of three major global rating agencies to grant the investment grade status to Indonesia.

"In our view, the Indonesian authorities have taken effective expenditure and revenue measures to stabilize the country's public finances despite trade shocks," S&P said in a statement.

S&P said the Indonesian government has become more realistic in setting up its annual budget, reducing the likelihood of a shortfall in future revenue that would widen the country's budget deficit.

Better tax database has also helped the government collect more tax and maintain a budget deficit below 2.5 percent of gross domestic product over the next three to four years despite a drive for massive infrastructure spending.

"We anticipate that Indonesia's net debt will remain at a moderate level below 30 percent of GDP," S&P said.

Government officials have long said that recent reforms to slash subsidies and more prudent budget management are reasons enough to rate Indonesian sovereign bonds as high as India's, South Africa's or Kazakhstan's.

Another debt rating agency, Fitch Ratings, upgraded Indonesia's sovereign debt rating to investment grade in 2011, followed by Moody's Investor Services in 2012. Fitch and Moody's have kept a positive outlook on the credit rating, indicating an upgrade is likely in the near future.

Risks

S&P said it sees a stable outlook for Indonesia's latest rating as downside risks balance out the country's upgrade prospects.

"Generating more revenue from tax has been a structural challenge confronting successive Indonesian governments. The ratio of general government revenue to GDP in Indonesia is the second lowest of all 67 investment-grade sovereigns, higher only than that of the Emirate of Sharjah," S&P said.

"This leads to high interest burdens as a share of revenues, despite Indonesia's relatively low government debt stock."

S&P also said that even though Indonesia has remained a relatively free society with stable political institutions, corruption remains a persistent problem that "stunted growth-enhancing, inward foreign direct investment."

According to the rating agency, the country should watch out for more trade shocks that could cut into revenues coming from abroad which can be used to pay back the country's existing external debts.

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