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Euromoney Country Risk

Why S&P is right to remain cautious on Indonesia

The rating agency is still holding out on awarding the investment grade Fitch and Moody’s are standing by. Euromoney’s Country Risk Survey explains why.

Indonesia emerged on the radar last year when the threat of a liquidity withdrawal from the US Fed’s tapering of its bond-purchase (quantitative-easing) programme sent the rupiah hurtling.

Those risks subsided when the closely fought presidential elections in July delivered victory for Joko Widodo, known as Jokowi – the popular reformist mayor of Jakarta – and there was a subsequent flurry of asset-market activity as confidence returned.

Yet Indonesia is still struggling to rise into the third of Euromoney Country Risk’s (ECR) five tiered categories commensurate with a lower triple B investment grade. In fact, it is two places lower in the survey compared with this time last year, and on a longer-term downward trend since the economic boom peaked a few years ago.

On a total risk score of 49.07 points out of a maximum 100, the world’s third-largest democracy – and southeast Asia’s largest economy – is struggling to rise higher than 67th out of 189 sovereigns on ECR’s global risk rankings – trapped in tier four.

The Philippines, five places higher in tier three, has five-year CDS spread of 99 basis points compared with Indonesia’s 167bp.


The various political, economic and structural factors (15 in all) comprising Indonesia’s ECR score help to explain its elevated risks.

None of the economic sub-factors scores more than 6.3 out of 10.

Indonesia’s commodity-dependent export base is vulnerable to slowing growth in China. The tightening of monetary policy is further choking an economy which grew by 5.1% in real terms during the second quarter.

That’s a percentage point lower than the average for 2010 to 12, making Jokowi’s 7% target for development an ambitious one.

Reforms are urgently required to improve the infrastructure, deregulate the labour market and bolster productivity growth, all of which make other Asian sovereigns a more attractive longer-term proposition.

“Indonesia has a low public debt, and is located in a region more resistant to the 2008 crisis,” says Louis de Fauconval, a country-risk analyst at BNP Paribas Fortis.

“Yet Indonesia suffers from twin deficits, volatile inflation, and has a rather high external debt compared with its exports receipts. This makes the country vulnerable to any investor confidence crisis – be it triggered by external or domestic factors, as shown by the volatility of its currency exchange rate.”


Political risk is even worse. Several factors rack up fewer than half the 10 points available, including corruption (3.1) and the political institutions (4.1).

Jokowi’s ability to eradicate the $21 billion-worth of fuel subsidies weighing on the state budget to improve a deficit recently revised higher to 2.4% for 2014 is likely to be constrained by his weak legislative standing in a parliament, where his support party is in a minority with little more than a fifth of the seats.

Parties loyal to the losing candidate Prabowo Subianto seem intent on conflict, denying Jokowi the power to enact reforms, highlighting what the ECR risk score suggests is misplaced market confidence – especially if US monetary tightening causes another round of currency wobbles.

Indonesia needs to move fast in developing a manufacturing- and services-based economy. Its political risks are holding it back. 

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

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