Indonesia’s credit rating outlook was changed to positive from stable by Standard & Poor’s, with the possibility that the country may be raised to investment grade within 12 months. The rupiah extended gains.
The country’s BB+ rating was affirmed, S&P said in a statement Thursday. Indonesia is rated on par with Russia and Hungary.
“Greater policy effectiveness and predictability have resulted in expanded fiscal and reserve buffers and improved Indonesia’s external resilience,” S&P said. “The positive outlook reflects the possibility that we could raise our ratings on Indonesia over the next 12 months if the government achieves its stated objective of improving the quality of expenditure.”
The move comes after President Joko Widodo removed gasoline subsidies this year, pledging to use the money instead to increase infrastructure spending and boost investment to achieve faster economic growth. Those efforts have been complicated by a slowdown in the country’s commodity exports and quickening inflation.
“Already, government spending is of much better quality now that the fuel subsidy has been scrapped,” said Handy Yunianto, Jakarta-based head of fixed-income research at PT Mandiri Sekuritas. “We’re optimistic that actual disbursement will improve in the coming quarters, following the necessary adjustment period after the new cabinet is formed.”
Earlier, Moody’s Investors Service said Indonesia’s narrower current account deficit and balance of payments surplus are credit positive because they lower annual external financing requirements amid heightened volatility in external financing flows.
The Jakarta Composite Index closed up 0.4 percent, reversing earlier losses after the announcement, while the rupiah also gained 0.4 percent. The nation’s dollar-denominated bonds due January 2025 jumped, pushing the yield to drop seven basis points, or 0.07 percentage point, to 4.05 percent, data compiled by Bloomberg show.
S&P said it will review Indonesia’s 2016 budget, due to be tabled in October, “to evaluate not only the government’s commitment to modest fiscal deficits but also its intentions for its vast public enterprise sector.” It could revise the outlook to stable if the government’s reform ambitions wane or macroeconomic imbalances rise, it said.
In a research note, Nomura Holdings Inc. economists Euben Paracuelles and Lavanya Venkateswaran said they regarded S&P’s decision as “unfounded”, citing recent policy decisions by Bank Indonesia and the “underwhelming” execution of the subsidy cuts.
They said they doubted the government would be able to meet S&P’s fiscal conditions for an upgrade to investment grade over the next 12 months.