Indonesia investment rating restored after 14 years

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.