Indonesia's Credit Rating: BB- With Positive Outlook

S & P’s sovereign debt analysts gather in NY from all over the world and its chairman, John Chambers(right), presides. But --as is customary-- even he casts only one vote.   The analysts arrayed in front of him --each an expert on a country-- bring their comparative tools to the discussion.  Ratings are still done the “old fashioned way” in a group format. S & P recently changed Indonesia’s BB- rating from stable to positive.   It wasn’t technically an upgrade, but its a welcome validation nonetheless.

John Chambers told AICC’s November 24 meeting (hosted by Duane Morris LLP with support from Bank Indonesia) that Indonesia was trending positive and ratings could further improve if Indonesia eliminated or reduced energy subsidies. S & P is heartened by the continuing consolidation of democracy in Indonesia and the strong macroeconomic management.  The same “old” weaknesses --although improved somewhat-- remain: infrastructure, legal system, corruption, debt burden.

The recent change to a BB- rating with a positive outlook reflects Standard & Poor's “expectation that a stronger political environment will give rise to a more effective policy setting to address structural problems, while debt reduction and underlying fiscal prudence will remain key elements of macroeconomic policy.” The report goes on to make the following excellent observation about the this year’s Presidential election:

“It also means that the traditional model of a closely intertwined political class and special interests may be more and more challenged in the future, as the electorate becomes increasingly confident and proficient in connecting its election choices to tangible outcomes”

Indonesia’s solid macro- economic management allowed Indonesia “to navigate the crisis without detriment to its fiscal and external credit metrics” leading to further improvements to public debt ratios.  S & P recommends policies be pursued that lead to reserve accumulation and reduction of fuel/energy subsidies (whose prices continue to hold upward price risks). Global demand for commodities and raw materials, which form the bulk of Indonesia’s exports, recovered faster than for high-value-added manufactured goods.

his key paragraph from S & P’s November 11 report is an excellent summary of the ongoing challenges that Indonesia’s is addressing.

“In addition, and notwithstanding the reforms over the past five years, numerous microeconomic distortions prevail, which ultimately detract from the sovereign's creditworthiness. Competitiveness is hampered by infrastructure  shortfalls, legal uncertainties, corruption, and labor market rigidities. A key challenge for the authorities is to maintain momentum and public support for reforms after this year's elections.”

I highly recommend reading S & P's recent full Indonesia Report available by clicking here