Indonesia's Credit Rating Upgrade: Funding Costs to Decrease, Sentiment to Improve

S&P has finally upgraded Indonesia's sovereign credit rating to investment grade, years after rivals Fitch Ratings did so in 2011 and Moody's Investors Services followed suit in 2012.

The country's bonds are now rated investment-grade by all credit-rating agencies, the first time since the Indonesian economy became a major victim of the 1997 Asian Financial Crisis.

Euphoria in Jakarta

The country's stock market jumped on the news, announced on May 19, to a record high of 5,820 points. The rupiah also strengthened against the US dollar. 

"This upgrade would allow Indonesia to access a pool of eligible foreign investors that only invests in at least IG rated assets, lowering funding costs," said Trinh Nguyen, a senior economist at French bank Natixis. "It will have a spillover impact to quasi sovereign assets as well as a sentimental lift that may boost equities and the real economy."

Vote of confidence

S&P had been dragging its feet on the upgrade because of worries about the country's ability to manage its public finances. Those fears have now subsided. S&P acknowledged that Indonesia has "exhibited effective policymaking in recent years to promote sustainable public finances and balanced economic growth," adding policy settings have "become more predictable."

The credit-ratings agency forecasts net goverment debt to stabilize around the currently low level of below 30% of GDP. Fitch and Moody's are expected to raise their investment-grade rating of Indonesia higher, which should further encourage investment into the country.



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