Country risk: It’s high time S&P took the plunge on Indonesia

By:
Jeremy Weltman
Published on:

It seems an appropriate time for the Asian borrower to regain its full complement of investment-grade ratings as it becomes safer in Euromoney’s country risk survey.

Jakarta plunge-R-600
S&P keeps Jakarta hanging: but will it fall in line with the other agencies?


Indonesia’s reputation for investor safety received a fillip earlier this year when it climbed one place, above Bahrain, in Euromoney’s country risk rankings, to 65th out of 186 countries.

Crucially, its risk score climbed to more than 50 points out of a maximum 100 for the first time in almost three years, as experts upgraded their scores for bank stability, monetary policy/currency stability, debt ratings and capital access.

Notably, Indonesia also managed to avoid the downgraded scores for other leading emerging-market (EM) sovereigns: 

Indonesia_ECR-600


Indonesia regained its investment grade from Fitch in December 2011, a move that was followed by Moody’s a month later, but S&P held off.

The agency is still prevaricating, only going as far as to reaffirm its positive BB+ rating recently, despite Indonesia ranking higher than Bahamas, Kazakhstan and Morocco in Euromoney’s survey. S&P rates all three investment grade.

Indonesia is now almost four points higher in the survey since the global financial crisis erupted in 2007/08. Malaysia and Thailand are worse off, and so are other EMs such as Brazil.

Economic strengths

Jakarta-based Winang Budoyo, chief economist at CIMB Niaga Bank, believes Indonesia is a suitable portfolio replacement for Brazil.

"Indonesia’s economy is in better shape compared to other emerging markets, with GDP growth expected to gain momentum," he says.

Forecasts from the IMF concur, showing GDP growing by 4.9% this year – the same pace as occurred in Q1 2016 – and 5.3% in 2017. 

That might be less than the Philippines, but it is stronger than Malaysia or Thailand, and it beats all of the main Latin American comparators. 

Domestic demand is boosting imports, but the current-account deficit as a proportion of GDP shrank to 2.4% of GDP in the fourth quarter of 2015 from 2.7% in the same period a year earlier. 

"Inflation is on a declining trend, the rupiah is relatively stable and the government’s budget is healthier following the reduction in fuel subsidies last year," says Budoyo.

Indonesia is vulnerable to depressed commodity export prices and capital flight, but president Joko Widodo has satisfied the markets to date by implementing some reforms since winning the elections in 2014, and the fiscal deficit has been held below 3% of GDP.

There is concern for the foreign debt held by the corporate sector, but public debt is lower than for similarly rated sovereigns, below 30% of GDP.

Indonesia’s survey scores for the economic-GNP outlook and government finances now far exceed Brazil’s. Indonesia is still lagging on all six political risk factors, but the gap is narrowing rapidly with Brazil in a flux.

Indonesia’s finance minister Bambang PS Brodjonegoro has moreover sent out reassuring signals his government is intent on diversifying the economy by revitalizing manufacturing and tourism, and taking advantage of rising production costs in China to boost exports.

There is much to do, but it seems to be just the time for Jakarta to push ahead, and for S&P to make its mind up.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.