S&P upgrades Indonesia’s sovereign rating to investment grade, IDR likely to outperform in region

On Friday, S&P Global Ratings raised Indonesia’s sovereign rating to an investment grade. The rating was revised to BBB- from BB+ with a stable outlook. After the revision, Indonesia has now acquired an investment grade rating from all the three major rating agencies. The upgrade was possibly due to the waning fiscal risks emerging from realistic budgeting and reduction in subsidies, noted ANZ. Consequently, S&P is of the view that net government debt is expected to remain below 30 percent of GDP.

The rating agency also complemented Bank Indonesia’s ability to weaken financial shocks, increase exchange rate flexibility and commitment to inflation targeting. The rising dependence on market based instruments in conducting monetary policy has been seen as a considerably optimistic development, stated ANZ. Also, the current account deficit’s contraction and inflation moderation were seen as positive developments too.

The rating upgrade is expected to confirm positive sentiment towards the Indonesian rupiah and IDR bonds. The IDR is likely to be the outperformer in the region and are tactically short the 3M INR/IDR NDF, said ANZ. A rebounding external position and higher foreign exchange reserves have eased the risk of any sharp weakening.

“Portfolio flows are the wild card but we continue to expect solid demand for Indonesian bonds on the back of their reform and yield appeal”, added ANZ.