EM News: Indonesia Draws Nearer To Investment Grade


By Gordon Platt

Indonesia’s stock market was expected to take a breather this year, after being one of the star performers of 2010, with an advance of 46%.

Instead, the benchmark Jakarta Composite Index was nearing a record high in early May, after climbing 14% from its February 2011 low.

Standard & Poor’s upgraded Indonesia’s sovereign rating in April to BB+, one notch shy of investment grade. The rating agency cited the country’s strong economy and cautious fiscal management, with continued improvement in external liquidity. Indonesia later reported a 6.5% rise in first-quarter gross domestic product, which was lifted by strong consumer spending and investment in Southeast Asia’s largest economy.

“We think that an investment-grade rating will be given to Indonesia by at least one of the big three agencies this year,” says Win Thin, global head of emerging markets strategy at Brown Brothers Harriman, based in New York.

Last year, the less widely known Japan Credit Rating Agency raised Indonesia’s foreign currency debt rating to investment grade.

The strong rupiah currency, which is near a seven-year high, is having a beneficial effect on price pressures, he says. The central bank raised interest rates by 25 basis points to 6.75% in February. “The consensus forecast is for 50 basis points more tightening this year, but we think it will be more,” Thin says. “Indonesia never went into recession during the financial crisis, which means it has much less excess capacity to fall back on.”