JAKARTA (TheInsiderStories) – Indonesia’ investment outlook is expected to increase after three international rating agencies – Standard & Poors Global Ratings (S&P), Moody’s and Fitch – raised the ratings for its strong economic growth prospects and prudent fiscal policy. The countries currency, stocks, dan bonds rallied.
The rating was increased to BBB from BBB- and put on a stable outlook by S&P. The long-term rating may be raised again if Indonesia’ external settings improve materially from their current levels, or if its fiscal settings improve over the next two years, it said.
Governor of Bank Indonesia (BI), Perry Warjiyo, said the rating is a reflection of the high level of confidence on the Indonesian economic prospect, which is supported by the monetary, financial sector, and fiscal policy synergy aimed to maintain macroeconomic stability while promoting the momentum of growth.
The rating upgrade will be a shot in the arm for President Joko Widodo, who’s pledged to bolster growth and expand an ambitious infrastructure drive that’s estimated to cost more than US$400 billion in his second term. It puts Indonesia at the same level as Hungary and Uruguay, but a notch below the Philippines, which won an upgrade from S&P last month.
Investors cheered the surprise rating upgrade with the Rupiah jumping as much as 1 percent against the dollar, its biggest gain since Jan. 31, 2019. While the yield on benchmark 10-year government bonds fell 9 basis points to 7.96 percent, the benchmark stock index surged 1.7 percent to close at its highest level since May 10.
Southeast Asia’ largest economy has been growing at about 5 percent despite significant headwinds, including last year’ emerging market rout. The government is estimating next year growth of 5.3 percent to 5.6 percent, even amid a deepening trade war between the United States (US) and China and as global demand wanes.
Finance Minister Sri Mulyani Indrawati trimmed the budget deficit to 1.79 percent of GDP last year, the smallest shortfall since 2011. The economists believed the rating upgrade will be a boost for Indonesia’ efforts to attract much-needed foreign investment.
According to David Sumual, chief economist of PT Bank Central Asia Tbk, the upgrade will also allow a wider pool of investors, especially foreign direct investment (FDI). The key for Indonesia is that achieving its growth potential of more than 5.5 percent will only happen by inviting more FDI in the coming years.
Widodo’ government set a target of investment at Rp792.3 trillion ($55.40 billion) in 2019, higher than Rp721.3 trillion in 2018. The target has covered 55 percent of foreign investment and 45 percent of domestic investment.
In 2018, the realization of investment in Indonesia reached Rp712.3 trillion, accounting for 94.3 percent of the target of Rp765 trillion in the medium-term national development plan.
In the fiscal year 2018, the country failed to achieve the target, because the investment only reached 94.3 percent of the target. Compared to the previous year, the investment in 2018 rose 4.1 percent, with domestic investment amounting to Rp328.6 trillion and foreign investment amounting to Rp392.7 trillion.
The domestic investment represented a 25.3 percent increase compared to the previous year. However, foreign direct investment in 2018 fell 8.8 percent compared to a year earlier.
The five largest foreign investors in Indonesia are Singapore ($9.2 billion or 31.4 percent of the total FDI), Japan ($4.9 billion, 16.7 percent), China ($2.4 billion, 8.2 percent), Hong Kong ($2.0 billion, 6.8 percent), and Malaysia ($1.8 billion, 6.2 percent).
Investor confidence has shown that Indonesia is still considered a potential country for manufacturing and production for both the domestic and export markets.
But, the ongoing trade war between the US and China has begun to take its toll on emerging economies and Indonesia has not been exempt. Indonesia’ finance ministry warned that the country’ GDP growth may fall even further to 5.15 percent if global economic uncertainty continues well into 2019.
BI is expected to increase its benchmark rate again in 2019 to keep pace with the increase in the Federal Reserves (Fed) funds rate. As an increase in the Fed’ funding rate will cause capital outflows from the country, this move will cause bank interest rates to rise which could inhibit loan growth and lead to a spike in non-performing loans that will eventually hamper economic growth.
On the internal side, Indonesia’ economy is plagued by twin deficits, like trade and current account deficits. In 2017, the country’ current account deficit reached $17.3 billion (-1.7 percent of GDP). This deficit, fortunately, can be compensated for by foreign capital inflows reaching $29.2 billion. The country still recorded a balance of payment surplus of $11.84 billion.
Indonesia’ growing deficit is due to the country’ mounting import levels over the last decade. Indonesia’ imports during January to August 2018 grew 24.52 percent to $124.18 billion from $99.73 billion in the previous year.
Oil and gas account for the majority of Indonesia’s imports with other significant imports being machinery and mechanical planes, automotive, organic chemical material, iron, steel, and plastic.
The government, however, recently imposed an increase in income tax of up to 10 percent on 1,147 imported consumer goods, including cosmetics, furniture, clothing, electronics, automotive, and food products, in a bid to curb imports.
So, in the longer term, Indonesia’ current economic situation may well be the right time for investors to invest in the country, especially in its financial instruments. Indonesian stocks and securities are highly undervalued amid the Rupiah depreciation and thus present a very interesting opportunity for investment.
Written by Lexy Nantu, Email: firstname.lastname@example.org