Standard and Poor's gives positive outlook on RI ratings

Dadan Wijaksana and Fabiola Desy Unidjaja, Jakarta

Global rating agency Standard and Poor's (S&P) may upgrade Indonesia's sovereign credit ratings in the near future after it revised on Wednesday the outlook of the ratings to positive from stable.

But S&P said that the rating upgrade would depend on the performance of the next government in implementing key economic reform programs.

"Looking ahead, the country's credit ratings could improve if the new government demonstrates its resolve for the continued and timely implementation of reforms," S&P credit analyst Agost Benard said in a press statement.

Indonesia's foreign currency rating of B is well below the credit rating of other neighboring countries like Thailand, Singapore and Malaysia.

An upgrade in the credit ratings would help improve investor confidence in the country, which badly needs new investments to bolster economic growth.

Some analysts expected S&P to upgrade the country's ratings one notch to B+ by the end of the year. The rating upgrade normally follows a upward revision in the rating outlook.

But such a rating is still below the investment grade rating of BBB, achieved by the country before the 1997-1998 financial crisis.

S&P said the outlook revision reflected continuing progress in the country's several key macroeconomic indicators, particularly a stable exchange rate, falling inflation and lower interest rates.

"Further progress in these areas could help reduce the vulnerability of the government's fiscal position," Benard said.

Not only has the government managed to gradually reduce its budget deficit and public debt-to-GDP ratio, it has also managed to improve its external liquidity.

By the end of the year, Indonesia's foreign exchange reserves should reach some US$35 billion -- sufficient to cover the payments of around six months of imports, S&P said.

The news from S&P has help improved sentiment in the local stock market and the rupiah, which earlier this week had been under strong pressure amid political uncertainty at home ahead of the July presidential election and a possible hike in the U.S. Federal Reserve's interest rate.

The rupiah closed higher at Rp 8,940 per U.S. dollar on Wednesday from Rp 9,000 the previous day, while the Jakarta Stock Composite Index jumped by 3.6 percent to 744.291.

Elsewhere, despite the progress in the Indonesian economy, some negative issues were also noted by S&P.

At the moment, the country's economic growth was still below its potential and relatively lagging behind its regional peers, it said, referring to Indonesia's modest rate of growth in the past three years, largely because of investment woes.

For this year, the government expects the economy to expand by 4.8 percent.

Benard said that the potential to grow faster would be based on continued broad-range of reform, "particularly in the judicial, legal and labor sector," to boost the investment climate.