As European Sovereigns Downgrade, Indonesia Sneaks An Investment Rating

 

In Europe the only news lately from ratings agencies is bad news. In Asia, the news is much more positive, with Indonesia in the limelight. Moody�s said Wednesday it had upgraded Indonesia�s sovereign rating to Baa3, its highest level since the economy began to implode in 1997. This upgrade puts Indonesia on par with other emerging markets that are moving up as Europe moves down. Last month Fitch took the lead in upgrading Indonesia to investment grade, and Moody�s has now confirmed it, so expect to see more global fund allocations to Indonesia, the largest economy in Southeast Asia and a beneficiary of higher energy and mineral prices. Proximity to India and China mean a scramble for resources with high price tags. Factor in political stability, well capitalised banks, and a large domestic market and it all starts to add up, though this doesn�t mean that Indonesia won�t stumble again, particularly in the run-up to a crucial election in 2014. But compared to the mess in Europe, Indonesia is in rude health. Its economy grew by an estimated 6.4% last year.

In its statement, Moody�s singled out Indonesia�s resilience to external shocks and its fiscal strength, while citing a banking sector that is less vulnerable to shocks.

Indonesia�s cyclical resilience to large external shocks points to
sustainably high trend growth over the medium term. A more favorable
assessment of Indonesia�s economic strength is underpinned by gains in
investment spending, improved prospects for infrastructure development
following key policy reforms, and a well-managed financial system.

In addition, robust growth has been accompanied by the continued health
of its external payments position, supported by increasingly large flows
of foreign direct investment, while inflationary expectations are
becoming better anchored at a more stable and historically lower level.

Prudent fiscal management has contained budget deficits at very low levels
and has reduced the government�s debt burden as a share of GDP.

As a result, Indonesia�s fiscal ratios now surpass many of its
higher-rated peers, providing more fiscal headroom to respond to economic
shocks. It has also reduced risk perceptions, enabling the government to
access international funding markets even during periods of heightened
risk aversion.

Fitch puts Indonesia�s public debt to GDP ratio at a measly 25%. Wind back to 1998, when the entire banking sector was wiped out, and you can appreciate the gains. The government has learned its lesson and is cautious about being overextended. So much so that Fitch says Indonesia needs to spend more, not less, to show investors that it�s serious. More on infrastructure and other public goods that would accelerate growth and help companies expand their reach. Visitors to Jakarta are appalled by the traffic congestion that makes it hazardous to attend meetings in different areas. Logistics are patchy elsewhere, and the electricity system has been starved of new investment. But there�s no doubting the dramatic turnaround in public finances since the Suharto regime steered over the cliff in 1997.