Indonesia won a second sovereign rating upgrade this year, with Fitch Rating 2018 raising its assessment to the second-lowest investment grade, months after S&P Global Ratings lifted the nation out of junk status.
The rating on the nation’s long-term, foreign currency-denominated debt was raised one level to BBB with a stable outlook, Fitch said in a statement on Thursday. The upgrade puts Indonesia on par with the Philippines and Portugal, which received upgrades just this month.
Indonesia’s resilience to shocks is among the key rating drivers as policy makers focus on stability, Fitch Ratings 2018 said, echoing similar comments from S&P which returned the country to investment grade in May. These endorsements of the nation’s economic stability are likely to help President Joko “Jokowi” Widodo as he embarks on a US$62 billion borrowing plan next year.
“With US treasury yields trending higher lately, this upgrade will help limit any rise in Indonesia’s risk premium and keep yields low,” said Handy Yunianto, head of fixed-income research at PT Mandiri Sekuritas.
“We expect overall Indonesian yields to stay relatively low despite rising US yields. The pieces lined up for Indonesia on the macro front, where we see growth bottoming out while inflation is trending down with low volatility.”
Investors have been rewarded with the nation’s local notes surging 16 percent this year, compared with 12 percent for emerging Asian bonds, according to Bloomberg indexes. The benchmark stock index climbed to a record this week. The rupiah gained 0.2 percent to 13,546 per dollar as of 8:33 a.m. local time on Thursday.
Rising foreign-exchange reserves and strong economic growth are other reasons for the upgrade, Fitch Ratings 2018 said. It expects Indonesia’s gross domestic product to rise 5.4 percent in 2018 and 5.5 percent in 2019, from 5.1 percent in 2017. Net foreign direct investment will cover the current-account deficit over the next few years as the ease of doing business ranking improves, the firm said.
Risks include potential emerging market pressure as the U.S. proceeds with rate increases, Indonesia’s high dependence on commodities and high level of net and gross external debt, as well as the upcoming elections.
The possibility that political noise becomes a distraction from economic policy making in the run up to the 2018 local elections and 2019 presidential election represents a risk to the strong reform drive and could undermine domestic and foreign market sentiment, although such an outcome is not Fitch’s base case, it said.