S&P lends positive outlook to Indonesia, re-affirms Indonesia’s sovereign credit rating

The Standard & Poor’s, a credit rating agency has affirmed the credit rating outlook for Indonesia at BB+, while lending a positive outlook to the country. However, the rating authority still left the economy one notch below the investment grade.

With S&P putting a positive outlook for the Indonesian economy, possibilities of an upgrade in the near term have risen, probably next year. Fiscal balances remain encouraging but the quality of spending has been rather disappointing.

The pace of capital expenditure spending continues to lag behind that of operational expenditure. In the meantime, tax collectors are struggling with their overly-optimistic targets. The fall in external debt and decent foreign reserve accumulation has been a key positive on the macro risk profile. Yet, there is plenty of room to improve, as Indonesia’s reserves to external debt ratio remains among the lowest in the region, DBS reported.

Meanwhile, despite all the talk about how current account deficit has narrowed to about 2 percent of GDP, the net foreign direct investment has also fallen to 1 percent of GDP. This means about 50 percent of the CAD is still financed by short term portfolio flows.

"We reckon GDP growth will inch closer to 5.5 percent in 2017, as investment recovers gradually," DBS commented in a research note.

However, with the global economy undergoing tough challenges, the affirmation of a BB+ rating is not to be concerned about, given there are possibilities of a revised upgrade to the rating.