World Economy

Indonesia Classed “Investment Grade”

The Indonesian upgrade will encourage more capital inflows and lower borrowing costs.The Indonesian upgrade will encourage more capital inflows and lower borrowing costs.

On May 19, S&P Global Ratings raised the sovereign credit rating of Indonesia to BBB- from BB+. In doing so, Southeast Asia’s biggest economy is now classed as “investment grade” by all three major ratings agencies—S&P, Moody’s and Fitch—for the first time in nearly 20 years.

According to S&P, “Indonesian authorities have taken effective expenditure and revenue measures to stabilize the country’s public finances despite the terms of trade shock”. The agency also praised Indonesia’s “effective policymaking in recent years to promote sustainable public finances and balanced economic growth” while economic policy was described as having become “more predictable recently,” Internationalbanker reported.

Indeed, the upgrade is just rewards for the Indonesian government’s concerted efforts to achieve investment-grade status, as well as providing an indication to the rest of the world of the buoyant state of Indonesia’s economy at present.

According to the country’s president, Joko Widodo, moreover, the upgrade is “very important” as it will encourage more capital inflows and lower borrowing costs. Indonesia will now be able to access a large pool of global foreign investors who seek exposure to only investment-grade assets at a minimum; the effect on confidence and the economy will, in turn, also be positive.

Indonesia’s gross domestic product has risen strongly over the last 10 years, with only a handful of quarters experiencing a dip below the 5% mark during this time.

Annual GDP growth for 2016 came in at 5%—a very respectable rate, and among the highest for large emerging economies. What’s more, the country has maintained this solidity throughout 2017 so far, thanks to “a supportive global environment, coupled with sound domestic fundamentals”, as stated in the World Bank Group’s June 2017 Indonesia Economic Quarterly publication.

Indeed, trade has been particularly helpful for Indonesia’s performance, with exports in May recorded at 8% higher than the previous month—and a hefty 24% higher on an annual basis. Exports account for almost 4.5% of Indonesia’s total economic output.

Nevertheless, a general feeling pervades that the country is still not entirely fulfilling its economic potential. Despite last year’s strong performance, it transpired during a 12-month period in which interest rates were cut no less than six times. Widodo himself has set a growth target of 7%.

Moreover, Bank Indonesia has left its benchmark seven-day reverse repo rate unchanged at 4.75% throughout 2017, largely in the hope that the previous cuts will eventually trigger a higher growth trajectory.

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