S&P Lowers Indonesia’s Outlook to Stable on Stalled Reforms

Standard & Poor’s cut its rating outlook on Indonesia’s debt to stable from positive, saying a stalling of reform momentum and a weaker external profile have reduced the chance of an upgrade over the next 12 months.

S&P maintained its BB+ rating on the nation’s long-term notes and B assessment on short-term securities. The company ranks Indonesia at its highest junk level, opting not to follow Fitch Ratings Ltd. and Moody’s Investors Service when they restored Southeast Asia’s largest economy to investment grade in December 2011 and January 2012, respectively.

“Slow progress in improving critical infrastructure, along with legal and regulatory uncertainties and bureaucratic obstacles, detract from Indonesia’s growth potential, thus delaying poverty reduction and economic development,” S&P said in an e-mailed statement today. “Political considerations related to next year’s parliamentary and presidential elections appear to increasingly shape policy formulation.”

Indonesia’s government will only reduce fuel subsidies after the state budget is revised to include compensation programs for the poor, which will probably be completed in May, President Susilo Bambang Yudhoyono said April 30. Without a reduction, the cost of maintaining the subsidies may rise to 297.7 trillion rupiah ($31 billion) this year from the current target of 193.8 trillion rupiah, he said.

Yields Rise

The yield on the 10-year government bonds advanced three basis points, or 0.03 percentage point, to 5.54 percent as of 4:44 p.m. in Jakarta, the highest level since April 11, prices from the Inter Dealer Market Association show. The rupiah fell 0.3 percent after the announcement to 9,756 per dollar before trading little changed at 9,727, prices from local banks compiled by Bloomberg show.

S&P said it may raise the country’s rating if the fuel reforms are finalized, the state budget is improved, or if structural reforms boost economic growth. The assessment may be lowered “if renewed fiscal or external pressures are not met with timely and adequate policy responses,” S&P said in the statement.

The government is seeking to reduce the burden of energy subsidies on the budget to free up funds for building infrastructure and boosting economic growth. An attempt last year to reduce the subsidies was called off amid public protests.

Fuel Policy

“There is no chance of S&P upgrading Indonesia this year,” Dian Ayu Yustina, a fixed-income analyst at PT Bank Danamon Indonesia, said in Jakarta. “Investor perception is clouded by uncertainty over the fuel policy. The market is still waiting to see if the fuel-subsidy reduction can be done without protests and complicated politics.”

The government may raise the price of subsidized gasoline to 6,000 rupiah a liter, from the current 4,500 rupiah, Coordinating Minister for the Economy Hatta Rajasa said on April 30. An increase of 1,000 rupiah may add about 1.6 percentage points to inflation, Deputy Governor Perry Warjiyo said last week. Consumer prices rose 5.57 percent last month, from a 22-month high of 5.9 percent in March, official data showed yesterday.

S&P also cut the outlook on the debt ratings of PT Pertamina, PT Perusahaan Gas Negara and PT Bank Negara Indonesia to stable from positive. All three companies are either wholly-or majority-owned by the Indonesian government.

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