Standard and Poor's (S&P) Global Ratings took rating actions on nine companies in Indonesia and the bonds they issued or guaranteed by them. Photo-Privacy.

JAKARTA (TheInsiderStories) – Rating agency Standard & Poor’s Global Ratings (S&P) said on Friday (05/31) it had raised Indonesia’s sovereign credit rating to ‘BBB’, citing the country’s strong economic growth prospects and supportive policy dynamics. The outlook is stable.

S&P had previously rated Indonesia at ‘BBB-’, the lowest investable grade awarded by the agency. S&P also raised its short-term sovereign credit rating to ‘A-2’ from ‘A-3’. Indonesia’s economy is expected to continue to perform strongly over the medium term, and that the country’s external position will stabilize.

“We raised the ratings to reflect Indonesia’s strong economic growth prospects and supportive policy dynamics, which we expect to remain following the re-election of President Joko Widodo recently,” S&P said in a statement.

Widodo is expected to continue to invest in infrastructure, though Widodo first has to overcome a challenge to his election victory that has been lodged by a rival in the Constitutional Court.

The government’s fiscal deficit fell to a multi-year low in 2018, and it expects to stabilize just below 2.0 percent of GDP over the next four years. “The sovereign ratings on Indonesia continue to be supported by the government’s relatively low debt and its moderate fiscal performance,” it added.

S&P gave the new rating a stable outlook and said it would continue to monitor the country’s external and fiscal balances over the next two years for a future rating decision.

Amid bouts of volatility in emerging markets in recent years, Indonesia’s widening current account deficit has been a source of concern.

Bank Indonesia after its May policy meeting adjusted its outlook for the current account deficit (CAD) to 2.5 percent -3 percent of GDP due to the United States (US)-China trade war and global growth slowdown, from an initial outlook of 2.5 percent of GDP. The current account gap was 3 percent of GDP last year.

Indonesia’s CAD is expected to shrink in the next few years, reflecting steady global demand and a recovery in its terms of trade. Although Indonesia’s terms of trade and overall current account position worsened in 2018, the agency does not believe this trend is structural in nature.

“Instead, a reversion to the mean will partially fuel a gradual improvement in the country’s current account through 2022, especially as its terms of trade normalize,” it said.

S&P expects total external debt – net of liquid assets held by the public and financial sectors- to fall to approximately 87 percent of current account receipts (CAR) in the next three to four years. That said, Indonesia’s external debt burden has risen over the past five years. Gross external debt amounted to more than one-third of GDP at the end of 2018. CAR will need to grow faster in order to materially improve the ratio of external debt to GDP.

The degree of support for exports stemming from currency depreciation has its limits, given Indonesia is a significant exporter of commodities, which are generally priced in global markets.

Nevertheless, the rupiah’s flexibility should provide some benefit to Indonesia’s external metrics over the next three to five years. At the same time, that flexibility has allowed the central bank to maintain ample foreign exchange reserves.

Together with prudential policy measures to manage the risks of private sector short-term external borrowing, gross external financing needs (current account payments plus short-term external debt) should decline to approximately 96 percent of CARs plus useable reserves by 2022, versus just above 100 percent in 2019.

S&P said Indonesia will not face the extraordinary risk of a marked deterioration in the cost of external financing, based on its sustained strong access to the markets and foreign direct investment over the recent years, even during periods of acute external volatility.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com