Indonesia Investment Grade Rating Looms as Fitch Raises Outlook

Indonesia moved closer to attaining an investment grade rating, its first since the Asian financial crisis more than a decade ago, after Fitch Ratings raised its outlook on the sovereign to positive from stable.

The company affirmed its BB+ grade on Indonesia’s local and foreign-currency debt, one step below investment grade, it said in a statement yesterday. An upgrade will put Indonesia on par with India and Brazil.

Rising consumer spending is driving expansion in the world’s fourth-most populous nation, increasing pressure on policy makers to restrain price gains and protect purchasing power. Indonesia’s economy grew at the fastest pace in six years last quarter, and the central bank increased its benchmark reference rate this month from a record low to curb inflation.

“The positive outlook reflects Fitch’s view that Indonesia’s favorable macroeconomic prospects are likely to see the credit profile strengthen further over the next 12 to 18 months, despite near-term risks from inflation and potentially volatile capital flows,” said Andrew Colquhoun, head of Asia-Pacific Sovereign Ratings at Fitch in Hong Kong.

Emerging-market nations from China to Brazil and Turkey are winning upgrades or positive outlooks on their sovereign ratings, highlighting the relative strength of developing economies amid soaring debt burdens in advanced nations from Greece to Japan.

Moody’s Action

Moody’s Investors Service last month raised Indonesia’s credit rating to the highest level since the 1997 Asian financial crisis, citing the nation’s “economic resilience” and improving public debt position. Moody’s Ba1 rating is also one step below investment grade.

Standard & Poor’s on March 12 lifted Indonesia’s sovereign credit rating to BB from BB-, two levels below investment grade, with a positive outlook.

Bank Indonesia on Feb. 4 unexpectedly raised its benchmark interest rate for the first time in more than two years after inflation climbed to a 21-month high. It had previously resisted higher rates to avoid attracting more foreign capital inflows, while opting to increase lenders’ reserve requirements and tighten rules on banks’ foreign-exchange holdings to help curb price advances.

Consumer-price growth accelerated to 7.02 percent in January from 6.96 percent in December.

Inflation Risk

“Inflation poses a near-term risk to economic prospects,” Fitch said in yesterday’s statement, estimating inflation to average 6.5 percent in 2011. “A more severe inflation shock than the agency expects, that is sufficient to damage economic and financial stability, would weaken the case for positive rating action.”

Gross domestic product increased 6.9 percent in the three months through December from a year earlier, the Central Bureau of Statistics said Feb. 7. The economy grew 6.1 percent in 2010.

“The economy is fundamentally strong but vulnerable to inflation,” said Eric Alexander Sugandi, a Jakarta-based economist at Standard Chartered Plc. “The fiscal condition is good. As long as Indonesia can survive the inflationary pressures, then the sooner it can get investment grade.” He predicts the country will reach that ranking by 2012.

President Susilo Bambang Yudhoyono seeks to expand the economy at an annual average rate of 6.6 percent and create 10.7 million jobs by the end of his second term in 2014, including through attempts to boost investment in the country’s infrastructure.

“Faster progress in tackling long-standing weaknesses in economic and credit fundamentals including the low tax take, infrastructure deficiencies and corruption, would further support the case for an upgrade,” Fitch’s Colquhoun said.

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