Moody's Upgrades Indonesia to Investment Grade

Moody's ratings agency upgraded Indonesia's credit status to investment grade on Wednesday, a status likely to draw more fund flows into Southeast Asia's biggest economy. 

AP

The upgrade to Baa3 from Ba1 with a stable outlook, which had been expected early this year, will reduce the country's borrowing costs and closes the gap with the so-called BRIC nations of Brazil, Russia, India and China. 

Indonesian stocks wiped out modest early losses and climbed into the black after the upgrade, while the rupiah currency

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[IDR=  Loading...      ()   ] rose 0.7 percent on hopes of further investment inflows. 

Fitch Ratings upgraded the country's status in December but Moody's decision matters because it will enable Indonesian bonds to be added to benchmark global indexes, freeing up buyers, particularly from the United States. 

It also makes the country more attractive to risk-averse investors, a boost for the government at a time when other more developed economies are being downgraded owing to the weight of their sovereign debt . 

"Indonesia's cyclical resilience to large external shocks points to sustainably high trend growth over the medium term," Moody's said in a statement. 

"A more favorable assessment of Indonesia's economic strength is underpinned by gains in investment spending, improved prospects for infrastructure development following key policy reforms, and a well-managed financial system." 

Prudent fiscal management had contained budget deficits at very low levels and had reduced the government's debt burden as a share of gross domestic product, Moody's added. 

"As a result, Indonesia's fiscal ratios now surpass many of its higher-rated peers, providing more fiscal headroom to respond to economic shocks. It has also reduced risk perceptions, enabling the government to access international funding markets even during periods of heightened risk aversion."  

Indonesian sovereign bonds jumped by as much as 1 point on the news and the cost of protection on its debt fell by 10 basis points.

An Indonesian finance ministry official said Standard and Poor's was expected to follow suit "very soon", while trade minister Gita Wirjawan said the country can achieve an 'A' grade rating in 2014. 

The upgrade reflects nearly a decade of economic  improvement in Indonesia, which was downgraded to junk status during the Asian financial crisis in 1997/98, when the 32-year rule of strongman Suharto came to an end. 

The only other major agency that has not upgraded Indonesia, S&P, rates the country at the highest non-investment level. 

"More fund managers can now buy Indonesian bonds because there are two investment grade ratings, said Ho Woei Chen, economist at United Overseas Bank in Singapore. 

"In terms of sentiment, it is positive but it is not a surprise." 

Indonesian's new 30-year bond sold earlier this month, initially indicated at a size of $500 million, attracted some $3.6 billion in orders. Jakarta ended up selling $1.75 billion of the bonds. U.S. buyers took just over half of that and European investors 12 percent, with Asians the rest. 

Indonesia's economy has been helped by greater fiscal stability and a boom in exports of commodities such as coal and palm oil, as well as by its relatively healthy financial balance sheet. Its principal challenges include a lack of infrastructure and corruption.  

"Issues related to governance and a fundamental assessment of institutional strength remain a concern in regard to a further improvement in Indonesia's credit fundamentals," Moody's said.