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Tue, 11 Jan 2011

FT/Why Indonesia deserves a credit upgrade

Indonesian stocks suffered a dramatic 4.2 per cent tumble on Monday, amid rising concern over inflation. But that should not distract attention from the underlying strength of south-east Asia’s largest economy, writes HSBC’s Wellian Wiranto.

Since the world financial crisis, Indonesia has become a mainstream destination for more and more investors and its improved profile is reflected in discussions over the country’s possible return to investment grade.

It used to be a matter of “if” the credit rating agencies would put the country back in the top league. Now it’s a question of “when”.

One reason is that Indonesia has proved to be doggedly resilient, thanks partly to the robust domestic consumption of its 240m people. The country clocked respectable growth of 4.5 per cent in 2009, while its more export-dependent neighbours fell into recession. Growth is expected to have accelerated to 6.1 per cent in 2010.

That helped to attract record portfolio inflows, with foreign ownership of Indonesian government bonds doubling from 15 per cent in the first quarter of 2009 to an all-time high of about 30 per cent in recent months.

A rising expectation that the country will be re-rated has been a forceful pull factor, along with recognition of its abundant natural resources, increasingly affluent middle class, and relatively cheap labour. We expect Fitch, which currently has the country at one notch below investment grade, to upgrade Indonesian sovereign bonds in the second half of this year. S&P and Moody’s, which currently rate Indonesia at two notches below, will most likely follow suit in 2012.

The sprawling archipelago is not free of weaknesses: it has poor infrastructure, lingering bureaucratic red tape and rigid labour laws.

The wait is still on for Bank Indonesia to tackle the inflation concerns that might have been behind Monday’s share price falls and strengthen its own credibility by hiking the policy rate from the current record low of 6.5 per cent, as we think it should.

But, all in all, we are positive on Indonesia. It was the only country in the G20 with a declining debt-to-GDP ratio in 2009, a trend that continued last year. Thanks to reduced government spending, its budget deficit for 2010 turned out to be 0.6 per cent of GDP, much lower than the 2.1 per cent expected at the start of the year.

A combination of strong growth, low sovereign debt and an agreeable fiscal balance is a good thing in normal times. In this day and age it is a rarity, and it makes Indonesia more than eligible for a promotion.

Wellian Wiranto is an Asian economist at HSBC in Singapore. This article is from the FT’s emerging markets blog: www.ft.com/beyondbrics