* S&P says to keep Indonesia rating below investment grade
* S&P says policy environment worsening, cites mining, fuel
* Q1 FDI rises 30 pct to record, pace of growth up from Q4
* Gains led by mining, but rule changes could curb interest
* Infrastructure must improve to lure manufacturing -analyst
(Updates with S&P statement)
By Matthew Bigg and Rieka Rahadiana
JAKARTA, April 23 Ratings agency Standard and
Poor's sent Indonesia a warning on Monday over recent policy
"slippage" under President Susilo Bambang Yudhoyono, holding its
sovereign credit rating below investment grade rather than
raising it as many expected.
Although S&P retained a positive outlook on its Indonesia
rating and lauded record first-quarter foreign direct investment
figures released earlier in the day, it singled out policies in
the key mining sector and failure to approve an immediate fuel
price hike as worrisome developments.
"The policy environment has deteriorated because of this
raft of recent measures or proposed measures, and the
government's inability to push through what is really not
subsidy reform, it is really a price adjustment and they
couldn't even do that," said S&P analyst Agost Bernard.
Foreign direct investment in Southeast Asia's largest
economy surged 30.3 percent year-on-year to 51.5 trillion rupiah
($5.61 billion) in the January to March period.
That exceeded the 25.2 percent rate posted in the last
quarter of 2011, boosted by mining investment and an
investment-grade credit rating in January from Moody's Investors
But analysts cautioned that new mining rules and weak
infrastructure could deter future investors, who helped to fuel
6.5 percent economic growth last year in the world's fourth most
populous nation as they were drawn to its large domestic market,
booming mine sector and relatively stable fiscal policy.
S&P's decision not to follow Fitch and Moody's with an
investment-grade rating, which would open the door for pension
funds, insurers and other institutions to buy Indonesian debt,
partly reflected concern over uncertainty in the mining sector,
which generates about 12 percent of the country's GDP.
Another key concern was parliament's failure in March to
approve an immediate rise in Indonesia's subsidised fuel prices,
Asia's lowest, which could carry implications for fiscal
"We have detected some policy slippages after a remarkable
decade of entrenching democracy following the collapse of the
Suharto administration," S&P said.
"Notwithstanding all this, the fundamentals are still strong
enough for us to maintain the positive outlook for the ratings,"
added S&P's Bernard, associate director of sovereign and
international public finance ratings.
Indonesia's rating was supported by low central government
fiscal deficits, a declining public sector debt burden,
strengthening external liquidity and a resilient economy, S&P
S&P held its sovereign credit ratings at 'BB+' long-term and
'B' short-term. It also affirmed its '3' recovery rating on
Indonesia's senior unsecured foreign currency debt.
FOREIGN DIRECT INVESTMENT
With Indonesia's fuel prices widely expected to be raised in
July, however, S&P's continued positive outlook could mean a
strong chance of a ratings upgrade before the year is over, said
Jemmy Paul, equity fund manager at Jakarta-based Sucorinvest
"The market already priced in S&P's rating since the House
of Representatives' decision to delay the rise in (the price of)
subsidised fuel," he added.
The upgrades by S&P's rivals had helped Indonesia draw
strong demand for global bonds issued last week, with yields
lower than those of some of its emerging peers and troubled euro
Particularly worrisome for Indonesia's investment outlook,
however, are recent mining regulations and proposals aimed at
boosting government revenue, including a law requiring foreign
miners to divest at least half their assets after 10 years,
The mining sector, which is creating new millionaires in a
commodity-led economic boom, took in nearly one-fifth of FDI in
the first quarter as existing investors pledged another $1.1
"The decisions from the government that have been taken in
recent months, that's going to impact some activity probably 12
months down the road ... I think it might slow investment," said
Dominic Schnider, executive director of wealth management
research at UBS.
New investment is key to achieving the country's ambitious
target of becoming a top 10 global economy by 2025 and hitting
Yudhoyono's 7 percent annual economic growth rate target.
This will be achieved by selling more finished products
rather than simply exporting raw materials and improving the
Indonesia investment chief Gita Wirjawan said the stronger
pace of foreign investment so far this year, in a quarter that
is usually slow, signals that investment will help to drive
robust economic growth for the year.
"Although the economies are slowing in many countries such
as the United States and the euro zone, investment activity is
still growing well," said Wirjawan. "This shows that policies
taken so far have been on the right track."
(Additional reporting by Andjarsari Paramaditha, Aditya
Suharmoko and Neil Chatterjee; Editing by Edmund Klamann)