Monday, 29 June 2015

Better economic prospects with a positive outlook?

Arisyi Fariza Raz
The Jakarta Post
28 May 2015

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On May 21, Standard & Poor’s (S&P) rating agency changed Indonesia’s credit rating outlook from stable to positive. The change indicates a possibility that Indonesia’s credit rating may be upgraded to investment grade within a year. Currently, Indonesia’s rating is BB+, a non-investment grade, whereas S&P’s lowest investment rating, BBB-, is just one notch above Indonesia’s current grade.

Based on S&P’s statement, the improvement to positive outlook was mainly underpinned by better fiscal management, because of reformed gasoline subsidies earlier this year, thus giving more room for more concrete fiscal expansion such as infrastructure spending. In addition to better fiscal prospects, S&P also praised Indonesia’s sufficient foreign reserve position, which improved the country’s external resilience.

The market immediately responded to this positive announcement. For instance, the Jakarta Composite Index (JCI) jumped by 0.4 percent to 5,313.21 on the day of the announcement. On the same day, the rupiah also slightly strengthened, appreciating to 13,136 against the US dollar.

In the longer term, this good news could affect the economy positively. The increased probability of receiving an investment grade from S&P will improve Indonesia’s economic atmosphere for investment, particularly from overseas. 

S&P has been widely regarded as the strictest rating agency. In 2013, it downgraded Indonesia’s outlook from positive to stable by stating that Indonesia had failed to gain momentum in reforming its economy. Meanwhile, S&P’s peers, namely Fitch and Moody’s, upgraded Indonesia’s rating to investment grade in 2011.

Therefore, as S&P has improved Indonesia’s outlook to positive again, all stakeholders in Indonesia must utilize this opportunity because even though this has become a very favorable prospect, we have to be aware that nothing will happen too easily. An improved credit rating will only have positive results if it is supported by the existence of continuous favorable economic conditions, both domestically and globally. 

In other words, Indonesia has to convince investors that it is the right place to invest by creating investment-friendly conditions. This includes stable macroeconomic conditions, a sound financial system, the existence of supporting infrastructure and a less rigid bureaucracy. At the same time, global economic conditions are also necessary to support strong investment flows. Currently, however, Indonesia is still facing economic challenges both domestically and globally. 

Domestically, the economy faces the prospects of an economic slowdown. Data published by the Central Statistics Agency (BPS) revealed that the economy only grew by 4.7 percent during the first quarter, the slowest pace since 2009. Another challenge is the external balance. Recently, Indonesia has experienced a current account deficit. Fortunately, the trade balance has been improving in recent months, even though stronger export growth is still necessary to re-establish external resilience.

Globally, the economic environment still has mixed prospects, even though many economists suggest it may fare better in 2015 compared to 2014. For instance, China’s economy, which contributes significant impacts to Indonesia’s external balances (either from trade and investment), is not expected to show, if any, substantial growth acceleration this year.  

The US economy has shown some improvements recently. However, these improvements are still fragile and more supporting data is needed to confirm the robustness of these improvements. A similar situation is also experienced by Japan. The economic prospects in the EU also show some uncertainties. Some stronger economies such as Germany and the UK have better economic prospects.

All these challenges, particularly the domestic ones, have to be tackled. Therefore, all stakeholders, including the government, need to take strong action. Indeed, some attempts have been carried out. For instance, the government recently announced that it would accelerate its fiscal spending throughout the year, which would bolster economic growth. However, more actions are necessary to convince investors to put their money in Indonesia. If they are convinced, then more investment will come to Indonesia, which will bolster economic growth and development.

Another important note to remember is the fact that S&P may not improve the credit rating when it again reviews Indonesia’s 2016 budget in October.

If Indonesia’s macroeconomic imbalances deteriorate or the government’s economic reform does not continue, then S&P will downgrade the outlook to stable again, just like what happened in 2013.

The writer is a graduate of the University of Manchester, the UK, and a professional in the financial sector. - See more at:


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