Tue, 23 Nov 2010

From: The Jakarta Globe

By Angela Dewan
Jakarta. Indonesia must look beyond its sovereign debt achievements and attract foreign investment in the real economy if it wants to finally achieve an investment-grade rating next year.

Although Indonesia is poised to win an upgrade to investment grade from Fitch Ratings, the agency is looking for a commitment to improving structural economic weaknesses in governance, infrastructure and competitiveness, according to Andrew Colquhoun, Fitch’s director of Asian sovereign ratings.

“We’d like to see people coming in to build factories, start businesses and so forth. Historically, Indonesia has not done as well as many of its neighbors in getting in that kind of capital,” he said.

Fitch pushed Indonesia’s credit rating up to BB+ in January, one notch below investment grade, on the back of improvements in sovereign debt and public finances.

The nation’s GDP-to-debt ratio has declined steadily from a high of more than 130 percent during the 1997-98 Asian financial crisis, falling to just 27 percent this month, according to Bloomberg.

The economy grew by 4.5 percent in 2009 and is forecast to see expansion topping 6 percent over the course of this year.

Standard & Poor’s and Moody’s Investors Service both rank Indonesia two levels below investment grade, but with a positive outlook.

These positive signs are also attributable to investor-friendly policy reform. Indonesia has seen an influx of foreign direct investment this year, expected to reach Rp 126 trillion ($14.1 billion) by year’s end.

“One slightly negative development this year has been the departure of the former finance minister, Sri Mulyani [Indrawati], under circumstances that didn’t reflect too favorably on the quality of public institutions,” Colquhoun said.

The setback could prove minor, he said, if Indonesia shows a continued commitment to fighting corruption and improving tax collection.

In August, President Susilo Bambang Yudhoyono vowed to crack down on the misuse of state funds. He announced that rigorous budget audits would be carried out by the President’s Delivery Unit for Development, Supervision and Oversight (UKP4).

The team has drafted a Grand Design for Bureaucratic Reform, which is currently under review.

The 15-year plan targets rampant corruption and cutting through some of the country’s notoriously complex red tape.

Indonesia ranks 121st of 183 countries in ease of doing business, according to an International Finance Corporation and World Bank report. Thailand, Malaysia and Vietnam rank 19th, 21st and 78th, respectively. Indonesia ranks 110th of 178 on Transparency International’s Corruption Perception Index.

“In the ease of doing business, we’d like to achieve a rank of 75,” said Tara Hidayat, UKP4 deputy of strategic initiatives.

Fauzi Ichsan, a senior economist at Standard Chartered Bank, said corruption and shady politics had little impact on achieving investment-grade status.

“Indonesia is one of the most politically stable nations in Asia,” Fauzi said.

Whether the government is corrupt or not, if it can pay its debts year after year, it should achieve investment grade on all three agencies’ ratings list by 2012, Fauzi said.

Corruption and political maneuvering were more likely to affect longer-term investment in infrastructure projects, Fauzi said. “And I think weak infrastructure is a much bigger obstacle to investment than corruption.”

Indonesia plans to more than double spending on infrastructure to $140 billion through 2014, funding roads, bridges and ports.

The government is also deliberating a bill to expedite land acquisition, a process that under current law can take years and causes endless delays for infrastructure projects.

“The biggest issue is land clearance,” Fauzi said. “Landowners and speculators are able to challenge the government and negotiate with the government. But I think this is the price of democracy that Indonesia has to pay.”