* Fitch first to raise Indonesia to investment grade since 1997 * 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 (Reuters) - 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 April. 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 markets." 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 backdrop. 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.