• S&P keeps Indonesia at BB+ with positive rating outlook
  • Government tax target was too ambitious, BCA’s Sumual says

S&P Global Ratings refrained from raising Indonesia to investment grade because of weak fiscal performance, while leaving the door open for a future upgrade.

S&P on Wednesday affirmed the country’s BB+ rating, the highest junk level, with a positive outlook, citing 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 five 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.

“Fiscal risk is heightening,” said David Sumual, chief economist at PT Bank Central Asia in Jakarta. “The over-ambitious tax target may have caused S&P to reconsider upgrading Indonesia’s rating.”

‘More Conservative’

Indonesia’s Finance Minister Bambang Brodjonegoro said last month that S&P officials were impressed with the government’s reform efforts during their trip. 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 improves, resulting in narrower deficits and borrowings remain low.

“S&P is considered 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.”

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