• S&P keeps Indonesia at BB+ with positive rating outlook
  • Finance minister says assessment is ‘not appropriate’

Indonesia’s long wait to win full investment grade rank got longer after S&P Global Ratings maintained its junk status, an assessment the country’s finance minister sees as “not appropriate.”

S&P on Wednesday affirmed the country’s BB+ rating, while leaving the door open for a future upgrade by maintaining a positive outlook. It cited forecasts for larger budget deficits in coming years and a decline in corporate credit quality. Fitch Ratings and Moody’s Investors Service awarded Indonesia investment grade status more than four years ago.

The failure to win to full investment grade status may take the shine off Asia’s best-performing bond market, with the nation’s local-currency notes gaining about 10 percent this year, according to indexes compiled by Bloomberg. The S&P report, following a visit by the ratings company to meet President Joko Widodo and his ministers in Jakarta, comes as government revenues fall short of targets because of weak tax collection and low commodity prices.

“While the Indonesian officials may have been hopeful, from the S&P standpoint, the test is in the pudding,’’ said Song Seng Wun, an economist at CIMB Private Banking in Singapore. “Indonesia has done a bit more than in previous years to strengthen its fiscal position but S&P may prefer to see a structural shift in its fiscal position, leading to an actual improvement on the revenue collection front.’’

Minister Responds

Indonesia’s fiscal conditions remain unchanged and this issue has been continually cited as the reason against an upgrade, Finance Minister Bambang Brodjonegoro said of Thursday S&P’s decision. “They never conducted a thorough analysis,” he told reporters in Jakarta.

To improve revenue, the government is relying on a plan for a tax amnesty to lure funds stashed overseas, yet that bill has been held up by parliament. Bank Indonesia says it will result in as much as 560 trillion rupiah ($41 billion) being repatriated and help boost economic growth to as much as 5.4 percent this year. The nation’s currency has strengthened 1.1 percent against the dollar in 2016, and the Jakarta Composite Index of shares is up 5.2 percent.

Another Solution

“The most important thing is to find another breakthrough to ensure that fiscal risk remains safe,” said David Sumual, chief economist at PT Bank Central Asia in Jakarta. “The government needs to come out with a more certain solution. The barrier with the tax amnesty plan is political.”

Indonesian sovereign bonds fell on Thursday, pushing the two-year yield up four basis points to 7.28 percent and the 10-year yield up five basis points to 7.90 percent, according to Inter Dealer Market Association prices. The rupiah shrugged off early losses to end 0.1 percent stronger at 13,644 a dollar, prices from local banks show. The Jakarta Composite Index fell 0.1 percent as banking and consumer stocks dropped, with PT Astra International down 2.6 percent.

“We should be patient,” said Scenaider Siahaan, director of debt portfolio and strategy at the Finance Ministry’s budget financing and risk management office in Jakarta. “The outlook remains positive, so they will upgrade us eventually. S&P wants to see the result of tax reform in the form of an increase in tax revenue.”

‘More Conservative’

Brodjonegoro said last month that S&P officials were impressed with the government’s reform efforts during their trip and State-Owned Enterprises Minister Rini Soemarno said an upgrade was expected in June. S&P said the positive outlook on its rating reflects the possibility of an improvement if the nation’s fiscal performance strengthens, resulting in narrower deficits and borrowings remaining low.

“S&P is considered the more conservative of the three agencies,” said Trinh Nguyen, a senior economist at Natixis Asia Ltd. in Hong Kong. “Of the three things that S&P asked Indonesia in the last rating action, the sovereign achieved reducing fuel subsidies, allocating its public investment efficiently, but still struggles with macroeconomic balance.”

Consumer prices in Indonesia rose at the slowest pace in more than six years in May, providing the central bank with more room to ease monetary policy after three interest rate cuts in the first quarter. The inflation rate fell to 3.3 percent from a previously reported 3.6 percent in April, the statistics agency said Wednesday. Southeast Asia’s biggest economy grew 4.92 percent in the first quarter from a year earlier, compared with 5.04 percent in the previous three months.

“Our GDP (growth) was lower than 5 percent in the first quarter, so I was convinced that the upgrade wouldn’t happen as S&P has another reason not to do it,” Handy Yunianto, head of fixed-income research at PT Mandiri Sekuritas in Jakarta. “But in my opinion, the fundamentals have improved, inflation remains low and we’re anticipating the tax amnesty coming into effect.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE