* Fitch first to raise Indonesia to investment grade since
* S&P, Moody's one notch below, expected to follow suit
* Puts Indonesia on a par with BRIC nation India
* Most investors had expected the upgrade next year
Dec 15 Indonesia on Thursday recovered its
coveted investment grade status from Fitch Ratings, the first of
the three major ratings agencies poised to give the emerging
economy a lift.
The move crowns nearly a decade of steady economic
improvement in Southeast Asia's largest economy, which had been
downgraded to junk status during the Asian financial crisis in
1997, when the 32-year rule of strongman Suharto came to an end.
Fitch raised Indonesia's long-term foreign-currency and
local-currency ratings by one notch to BBB-minus, the first rung
of the 10-step investment scale and on par with India, Colombia
and Morocco. It said the outlook on the ratings was stable.
"The upgrades reflect the country's strong and resilient
economic growth, low and declining public debt ratios,
strengthened external liquidity and a prudent overall macro
policy framework," said Philip McNicholas, director in Fitch's
Asia-Pacific Sovereign Ratings group.
Fitch's rivals, Standard & Poor's and Moody's, both rate
Indonesia at the highest non-investment level.
A second upgrade, essential for Indonesian bonds to be added
into benchmark global indexes, seems more likely to come from
S&P, which has a positive outlook on the country's ratings since
Financial markets have long expected Indonesia's ratings to
be raised to investment grade, which reduces the country's
borrowing costs and closes the gap with the so-called BRIC
nations of Brazil, Russia, India and China.
It also makes the country more attractive to risk-averse
investors, a boost for the government at a time when other
bigger and more developed economies are getting downgraded owing
to a weight of sovereign debt.
"Indonesia, in terms of sovereign risk, is better than
several western European countries," said Jerome Booth, head of
research at Ashmore Investment Management in London. "Ratings
agencies are still behind the curve in the sense that developed
countries are several notches too high compared to emerging
Still, the timing of Fitch's move was a surprise because
many analysts had not expected the upgrade until next year.
"Markets have projected this, but the timing is a surprise.
It was expected to be given within one year. Bank Indonesia also
said it would be delayed. But this is positive for the bond
market," said Eric A. Sugandi, an economist at Standard
Chartered Bank in Jakarta.
Fitch said in a statement that it expected Indonesia's
economic growth to average more than 6 percent in the year
through to 2013, despite a less conducive global economic
It said that like in 2008, it expected the economy to be
resilient to external shocks.
"Low public debt and positive real interest rates give the
authorities policy flexibility to respond to any slowdown," it
said, adding the central bank had shown a greater willingness to
tackle inflationary pressures.
Fitch said Indonesia's ratio of gross government debt to
gross domestic product (GDP) was well below the median for
countries rated BBB, while the debt to revenue ratio was
expected to drop in 2012 to near the median.
It noted that long-term structural weaknesses remained to be
resolved, including poor infrastructure and corruption. But
Indonesia's infrastructure is not the weakest in the BBB class.
Susilo Bambang Yudhoyono, Indonesia's first directly elected
president, secured two mandates partly on his reform
credentials, including promises to clean up corruption.
He has achieved some success in attempts to rein in graft in
government offices and create a more transparent bureaucracy.
But reform has moved more slowly than the economy. Indonesia
improved to 3 on Transparency International's corruption
perception index in 2011 from 1.9 in 2001.
Indeed, Fitch said the "political environment is becoming
less conducive to reform, suggesting Indonesia's sovereign
credit profile is likely to remain at the weaker end of the BBB
range for some time." Fitch has three steps in the BBB range.
Indonesia's economic growth has more than doubled in the
past 10 years from 3.3 percent in 2001 to more than 6 percent in
recent years, helped by greater fiscal stability and a boom in
exports of commodities such as coal and palm oil. The central
bank expects growth in 2011 to be 6.5 percent.
A large consumer market in the country of 240 million helped
the country ride through the global economic crisis with the
rare distinction of avoiding a recession. GDP rose 6.1 percent
in 2008 and 4.5 percent in 2009.
Indonesian officials welcomed the Fitch upgrade, although
Indonesia's Trade Minister Gita Wirjawan said it was overdue.
"This is within our expectation, although the recognition is
a little bit late," he told Reuters via telephone text message.
"(The upgrade) will give a positive impact for Indonesia's
investment and trade."
Analysts said the upgrade will boost investment flows into
Indonesia because it will allow funds in that can only put their
money into investment grade debt.
Foreign investors bought a record net 87.8 trillion rupiah
($9.7 billion) of Indonesia government bonds last year, partly
in anticipation of the ratings upgrade.
Investment in government bonds so far this year is 28.6
trillion rupiah, a much lower figure because the euro zone debt
crisis has prompted uncertain investors to repatriate funds.
"We have anticipated this because markets have considered
Indonesia as investment grade, as seen by the Indonesian global
bond yields and the CDS spread," said Rahmat Waluyanto, head of
the debt office at Indonesia's finance ministry. "Demand for
Indonesian bonds will be higher, and capital inflows,
particularly foreign direct investment, will be higher."
Jeremy Brewin, a portfolio manager at Aviva Investors in
London said it will take a ratings upgrade from either S&P or
Moody's to prompt major buyers from the United States.
"That's meaningful because once they have two agencies,
Indonesian debt will become appropriate to include in a number
of portfolios in the United States," he said.
S&P has said in previous reports it wants to see Indonesia's
inflation being tamed with continued improvement in the
government balance sheet before raising the country's ratings.
The agency's positive outlook on the country's ratings suggests,
however, that an upgrade is possible next year.
For Moody's, Indonesia's investment grade status hinges not
only on monetary and price stability, but also on sound bank
supervision, deeper domestic capital markets, and higher foreign
direct investment rates.