Singapore. Standard & Poor’s Ratings Services today raised its long-term foreign currency sovereign credit ratings on the Republic of Indonesia to ‘BB’ from ‘BB-’. The outlook is positive. At the same time, Standard & Poor’s affirmed its ‘BB+’ long-term local currency rating and ‘B’ short-term foreign and local currency rating. The outlook on local currency rating remains positive.

“The rating upgrade reflects steadily improving debt metrics and growing foreign currency reserves with continued cautious fiscal management,” said Standard & Poor’s analyst Agost Benard.

With nominal GDP growth averaging just under 20% and primary fiscal surpluses averaging 1.9% of GDP over the past five years, net general government debt declined to 26% of GDP in 2009, half what it was five
years ago. Standard & Poor’s believes the government will remain committed to cautious fiscal management and that nominal GDP will continue growing at double digits, with government debt ratios improving further.

Indonesia’s external liquidity is supported by a steady accumulation of foreign reserves, now at nearly U$70 billion (as of end February), providing approximately 5.5 months of current account payments cover. However, Indonesia’s ratings continue to be constrained by relatively high external debt of a projected 58% of current account receipts this year, and a low-income economy with per capita GDP of US$2,300, which is still less than half the median for the ‘BB’ rating category. Structural and institutional impediments to higher economic growth remain rating constraints.

The affirmation of the ‘BB+’ local currency rating is based on our view that the sovereign’s fiscal flexibility does not yet match what is typically associated with higher rating categories, due to the combination of intermittent inflationary pressure, a narrow revenue base, significant infrastructure needs, and a difficult-to-adjust subsidy regime.

“The positive outlook reflects Standard & Poor’s expectation that the political pressures experienced by the administration will prove to be only a temporary distraction from implementing its fiscal, administrative, and structural reform agenda,” said Mr. Benard.

The ratings could be raised if inflation pressure diminishes, the external debt burden declines, the sovereign’s balance sheet improves, or reforms such as subsidy rationalization suggest that fiscal and external vulnerabilities are reduced. Conversely, a stalling of reforms or the absence of timely and adequate policy response to renewed fiscal or external pressures would result in the outlook reverting to stable.

Source: Standard & Poor’s – 12 March 2010

Primary Credit Analyst: Agost Benard, Singapore, (65) 6239-6347; agost_benard@standardandpoors.com

Secondary Credit Analyst: Kim Eng Tan, Singapore.

• Improving government debt ratio and growing foreign currency reserves reduce Indonesia’s vulnerability to shocks.
• We have raised our long-term foreign currency sovereign credit rating to ‘BB’ from ‘BB-’ and affirmed the ‘BB+’ long-term local currency rating on the limited fiscal flexibility.
• The positive outlook on the long-term foreign currency rating reflects our expectations that the broader economic and fiscal reform agenda will proceed apace once the current political distractions subside.