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UPDATE 1-S&P raises Indonesia's rating to 'BBB' on strong economic prospects

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May 31 (Reuters) - Ratings agency S&P said on Friday it had raised Indonesia's sovereign credit rating to 'BBB', citing the country's strong economic growth prospects and supportive policy dynamics.

S&P had previously rated Indonesia at 'BBB-', the lowest investable grade awarded by the agency.

The upgrade put S&P on par with the ratings awarded by two other major credit rating agencies, Fitch and Moody's.

S&P also raised its short-term sovereign credit rating to 'A-2' from 'A-3'. (http://bit.ly/2WcvKbb)

"We raised the ratings to reflect Indonesia's strong economic growth prospects and supportive policy dynamics, which we expect to remain following the re-election of President Joko Widodo recently," S&P said in a statement.

Re-elected in April, Widodo is expected to continue to invest in infrastructure, though Widodo first has to overcome a challenge to his election victory that has been lodged by a rival in the Constitutional Court.

"The sovereign ratings on Indonesia continue to be supported by the government's relatively low debt and its moderate fiscal performance," it added.

S&P gave the new rating a stable outlook and said it would continue to monitor the country's external and fiscal balances over the next two years for a future rating decision.

Amid bouts of volatility in emerging markets in recent years, Indonesia's widening current account deficit has been a source of concern.

Bank Indonesia after its May policy meeting adjusted its outlook for the current account deficit to 2.5%-3% of GDP due to the U.S.-China trade war and global growth slowdown, from an initial outlook of 2.5% of GDP.

The current account gap was 3% of GDP last year.

The rupiah, which has been hit by renewed concerns over the fallout from the Sino-U.S. trade war in recent weeks, strengthened by 1% following the rating upgrade on Friday.

Handy Yunianto, a fixed income analyst with Mandiri Sekuritas, said any rating upgrade news will be positive for Indonesian markets despite S&P lagging behind the two other major credit rating agencies.

"At least this enforces our belief that there is potentially a further upgrade next year by Fitch and Moody's, should the current account balance improve, inflation remain below 3.5 percent and tax revenues be sustained," Yunianto said.

Indonesia reported a current account deficit of 2.6% of GDP in the first quarter this year, while inflation stood at 2.83% in April.

(Reporting by Philip George in Bengaluru, Fransiska Nangoy in Jakarta; editing by Patrick Graham & Simon Cameron-Moore)