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Indonesia Rating Raised by S&P to Highest Since '97 Asian Financial Crisis

Indonesia’s credit rating was raised by Standard & Poor’s to the highest level since the Asian financial crisis hit the country in 1997 because of the nation’s “resilient” economy and improving finances.

The long-term foreign-currency rating was increased one level to BB+ from BB, with a positive outlook, the company said in a statement today. The rating, which was last increased in March 2010, is now one level below investment grade.

Indonesia’s dollar bonds due March 2020 advanced, with yields on the 5.875 percent notes falling nine basis points to 4.89 percent, the lowest level in almost three weeks. Indonesia’s economy grew at the fastest pace in six years in the final quarter of 2010 on rising consumer spending, and the central bank in February increased its benchmark rate from a record low to curb inflation.

“The rating upgrade reflects continuing improvements in the government’s balance sheet and external liquidity,” said Standard & Poor’s credit analyst Agost Benard. The change comes “against a backdrop of a resilient economic performance and cautious fiscal management.”

Bank Indonesia expects today’s upgrade to attract long-term fund inflows, Darmin Nasution, the governor, said in Nusa Dua, Bali. Indonesia should deepen its financial market and boost infrastructure development ahead of further rating upgrades, Nasution said.

Rising Outlook

Fitch Ratings and Moody’s Investors Service also rank Indonesia one level below investment grade. Fitch in February raised its BB+ outlook on Indonesia to positive from stable.

“We expect Moody’s, S&P and Fitch to upgrade Indonesia’s credit rating to investment grade by the end of 2012,” said Fauzi Ichsan, a Jakarta-based senior economist at Standard Chartered Plc. “It is positive for capital inflows and once Indonesia is investment grade it will open doors for a lot more funds.”

Many investors will wait until the change before betting on the country, said Dilip Shahani, Hong Kong-based head of research in Asia-Pacific for HSBC Holdings Plc. (HSBA)

“It will affect Indonesian dollar bonds only when it happens, not before it happens, because certain groups cannot invest in sub-investment grade,” he said.

Rate Increase

Bank Indonesia avoided joining counterparts from Malaysia to India in tightening policy last year before unexpectedly raising rates in February by a quarter of a percentage point. Policy makers left rates unchanged last month and economists forecast the same outcome at a meeting next week.

Consumer prices in Southeast Asia’s largest economy rose 6.65 percent last month from a year earlier, slower than the 6.84 percent pace in February. The central bank said last month that it isn’t concerned about inflation in March, April and May as pressure on prices eases.

“We may raise the ratings 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 further reduced,” Benard said.

“Conversely, a stalling of reforms or the absence of timely and adequate policy responses to renewed fiscal or external pressures would result in the rating stabilizing or weakening.”

Fuel Sales

Indonesia’s parliament last month approved a government proposal to delay a planned cut in subsidized fuel sales that was scheduled to begin April 1. The plan was postponed because of the threat of faster inflation amid rising oil costs, and no decision has been made on how long it will be delayed, according to Teuku Rifky Harsya, chairman of the parliamentary commission for energy affairs.

“It will still take time before Indonesia can reach investment grade rating as inflation still remains a threat,” said Handy Yunianto, a fixed income analyst at PT Mandiri Sekuritas in Jakarta. “If oil prices continue to rise, this can widen the budget deficit because of the fuel subsidies that the government gives.”

The nation also remains vulnerable to external shocks because of its shallow domestic capital markets, while the risk has lessened, Benard said.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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