Moody’s Investors Service upgraded Indonesia’s sovereign rating to investment grade on Wednesday – a nod to government efforts to keep economic growth rates high despite the lingering Eurodebt crisis.
The upgrade comes on the heels of Indonesia receiving an investment grade rating from Fitch International for the first time since the Asian financial crisis in 1998.
Moody’s lifted Indonesia’s foreign-and-local-currency rating from Ba1 to Baa3, the lowest investment grade rating, with a stable outlook, citing the country’s strong economic fundamentals and its resilience to external shocks amid the current global crisis.
Bank Indonesia (BI) Governor Darmin Nasution said the upgrade reflected the improvement of international rating agencies’ confidence in Indonesia’s economy. “The upgrade indicated that market confidence is also increasing,” Darmin added.
The upgrades will have a positive impact on capital inflows as fund managers are more likely to consider Indonesian debt instruments lower risks. “Indonesia will be a safe-haven country that can attract investors. Capital inflows will surge. The rupiah will be stronger,” BI deputy governor Hartadi Sarwono said.
Emerging-market economies from Brazil to Turkey to the Philippines have been winning rating upgrades as their governments have taken steps to contain budget deficits and boost growth, even as Europe’s debt crisis prompted Standard & Poor’s to cut the credit ratings of nine of the 17 nations in the eurozone recently.
Financial markets were up following the announcement. The rupiah advanced 0.3 percent to Rp 9,060 per US dollar, while the Indonesia Stock Exchange’s Jakarta Composite Index (JCI) rose 0.4 percent to close at 3,978 in active trading.
Moody’s also upgraded foreign currency deposit ratings for nine Indonesian banks to Baa3/Prime-3 with a stable outlook, comprising Bank Central Asia (BCA), Bank CIMB Niaga, Bank Danamon Indonesia, Bank Mandiri, Bank Negara Indonesia (BNI), Bank Permata, Bank Rakyat Indonesia (BRI), Bank Tabungan Negara (BTN) and Pan Indonesia Bank (Panin).
“This will help lower Indonesia’s borrowing costs across the board, indirectly increasing GDP [gross domestic product],” Mark Matthews, Bank Julis Baer’s Asian research chief, said.
Matthews said the upgrade was “not surprising, although the timing is earlier than expected”.
Yields on the 4.875% government bonds due in 2021 fell six basis points (0.06%) on the news of upgrade, to 3.98%, according to Bloomberg. Yields move in the opposite direction of prices.
“With the upgrade, risks will decline, demands for government bonds will increase, the domestic financial market will become more stable,” Finance Ministry debt management chief Rahmat Waluyanto said.
Meanwhile, Finance Minister Agus Martowardojo reiterated the government’s commitment to reforms so that Indonesia’s ratings could be further upgraded. “The issues that need to be improved, including infrastructure and fiscal and debt management, remain under our attention.”
According to Moody’s statement, for a further rating upgrade, Indonesia would have to mobilize state revenue, address infrastructure bottlenecks, maintain a healthy balance of payments and monetary and price stability, and deepen capital and credit markets.
“With Indonesia’s condition and trajectory in the future, there’s no reason not to get an A rating in 2014,” Trade Minister Gita Wirjawan said.
(The Jakarta Post, Esther Samboh, Bagus BT Saragih, Rangga D. Fadillah and Hans David Tampubolon)