[This story was first published at 18:19 p.m. on Thursday, May 21, 2015, and this update adds analyst comments, background.]

Jakarta. International credit rating agency Standard & Poor’s may raise its grade on Indonesia’s long-term sovereign credit ratings over the next twelve months, citing a brighter outlook following the government’s recent policy reform efforts.

The rating agency has upgraded its outlook for Indonesia from positive to stable, although it held the country’s long-term sovereign credit ratings at BB+.

The agency also forecast Indonesia’s economy to grow by 5.5 percent this year, slightly lower than the government’s target of 5.7 percent, according to a statement released on Thursday.

“Our outlook revision reflects our view of Indonesia’s improved policy credibility stemming from initiatives to bolster monetary and financial sector management as well as economic performance,” S&P said in the statement.

“We expect these actions to improve Indonesia’s growth prospects and external resilience.”

S&P is the only major credit rating agency that has not yet placed Indonesia at investment grade.

Fitch Ratings and Moody’s have maintained the same investment grade rating for Indonesia for the past three years.

Despite a more upbeat outlook, the ratings agency emphasized that the government still has a lot of work ahead, such as ensuring infrastructure development and untangling regulatory and bureaucratic obstacles.

“The positive outlook indicates the possibility that we could raise our ratings on Indonesia over the next 12 months if the government achieves its stated objective of improving the quality of expenditure,” said S&P.

“This would include allowing fuel pump prices to adjust more freely and allocating its public investment budget efficiently,” the ratings agency added.

Looking forward

S&P is also looking to review the 2016 state budget, which is due for House discussion in October, in order to “evaluate not only government commitment to modest fiscal deficits but also its intention for is vast public enterprise sector.”

The rating agency estimated the country’s fiscal deficit at 2.3 percent of gross domestic product this year, compared to the government’s 1.9 percent goal in the state budget.

Market response

Indonesia’s financial market embraced S&P’s signal of hope as the main stock index and the rupiah both moved positively on Thursday.

The Jakarta Composite Index (JCI) gained 0.4 percent to 5,313.21, bolstered by a 1.95 percent and 0.5 percent growth in the financial and the infrastructure sectors respectively.

The Indonesian rupiah strengthened to 13,136 per US dollar from 13,140 the day before, according data from Bloomberg reported at 5:15 PM.

Panin Asset Management president director Winston Sual welcomed S&P’s decision to revise Indonesia’s rating outlook to positive, saying that Indonesia needed the good news amid a dearth of positive news for the macro economy.

Although welcoming the good news, Winston however admitted that he was rather perplexed with the news as he was expecting S&P’s to give Indonesia a neutral or negative outlook.

“To be honest, I was kind of surprised because many people had expected it to be neutral or negative, especially since our reserve buffer had also declined,” Winston said on Thursday.

Winston said the positive outlook would have positive impacts on investors, bonds, rupiah and the banking sector.

“The improved outlook will help make investors confidence grow and improve our bond market in the future,” he said.

Jeffrosenberg Tan, portfolio manager at Sinar Mas Asset Management, an asset management arm of Sinar Mas Group, echoed Winston, saying such news is a good “catalyst” for the market amid pessimism over the country’s economic growth outlook after the Central Statistics Agency announced that the first quarter growth at 4.71 percent year-on-year, weaker than economists had expected.

“This is a good news, but the real impact is only when the rating has been raised,” said Jeffrosenberg, adding, he was disappointed, as he had expected S&P to in fact raise the rating.

He said the market is anxious now about the economic situation due to a number of reasons.

“If we observe the corporate earnings in the first quarter, it feels like we are having recessions, there are major companies seeing up to 30 percent decline in revenue.

“On the government’s spending, we don’t see fast executions on some major projects.

“Delays in many projects, our bureaucrat relationships aren’t too positive. These all create uncertainty,” he said.

Jeffrosenberg said he don’t expect that growth to accelerate in the second quarter of this year, but for the entire year, he is estimating Indonesia’s economy to expand by 5.1 percent.

More work to do

Ina Primiana, an economist from the Bandung-based Padjadjaran University, said the outlook improvement must also encourage the government to do internal improvements like improving legal certainty, business permits and easing land acquisition rules.

“There must be improvements between central and regional administrations, which will help investors in doing business in the country,” she said.

Meanwhile, David Sumual, chief economist at Bank Central Asia said Indonesia is one step closer to getting the investment grade.

“Usually after the rating is raised, within six months and a year we would be raised to investment grade,” he said.

“This is positive for investors’ portfolios, hedge funds, insurance, pension funds which are a long term investment,” he said, cheering up the news.

“The rating will also boost bigger capital inflow to the country,” David said.

GlobeAsia

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