Fitch upgrades Indonesia, more investments likely

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Fitch Ratings upgraded Indonesia's sovereign rating to one notch below investment grade, giving a vote of confidence that is likely to spur further investments to Southeast Asia's biggest economy.

Indonesia's rating was lifted to BB plus with the rating agency citing rising foreign exchange reserves, improving public finances and strong growth prospects as key factors behind the move. The outlook on the rating is stable.

The upgrade of Indonesia's long-term foreign and local currency ratings tightened spreads on credit default swaps and pulled the rupiah off intraday lows and analysts said an investment grade rating was likely in the next few years.

"I expect Indonesia's ratings to be upgraded into investment grades within the next 12-18 months," said Anton Gunawan, chief economist at Bank Danamon in Jakarta.

"I see capital gains for holding Indonesia's bonds with maturity above 10-years for long-term investors and the rupiah should also get a boost," Gunawan said.

Foreign investors have been pouring money into the economy on its strong economic outlook as well as its high yield.

The stock market jumped over 80 percent and bonds posted equity-like returns last year also as investors have been attracted by the tantalising prospect that relatively stable politics and healthy economic growth could catapult the country to investment-grade status in a few years to stand alongside BRIC nations Brazil, Russia, India and China.

PIMCO, the world's biggest bond fund manager recently told Reuters earlier this month that it expects the economy to get an investment grade rating in the next three to five years.

The yield on the 10-year bond currently stands at 9.75 percent, more than double the 3.6 percent on the 10-year U.S. Treasury.

Reforms

Fitch now has the highest rating for Indonesia among the three major rating agencies, though it remains below its investment grade rating prior to the 1997 Asian financial crisis.

Standard & Poor's rates Indonesia's unsecured foreign currency debt at BB minus, while Moody's Investors Service has its sovereign foreign currency rating at Ba2, two notches below investment grade.

Indonesia's public debt to gross domestic product ratio was among the lowest in the region at 30 percent last year, half of that of Philippines and much lower than India's 80 percent.

The upgrade means it is the highest ranking non-investment grade country in Asia ahead of the Philippines and Vietnam.

Its five-year credit default swaps tightened by 3 basis points to 210 basis points after the Fitch upgrade, a Hong Kong based trader said.

Fitch noted, however, that the country's relatively shallow capital markets remained vulnerable to risks surrounding a reversal of carry trades or sudden emerging-market risk aversion. It also said more reforms in its financial sector were needed.

Reforms from the re-elected President Susilo Bambang Yudhoyono's cabinet have been a key factor for the new wave of optimism on the economy though the process may slow after a scandal surrounding a bailout of a local bank ensnared two key reformists.

"The concerns on the ground are the success of the reforms. To get investment grade, the reforms would have to play out," said Wellian Wiranto, Asian economist at HSBC in Singapore.

Moody's said last week the momentum in reform will likely slow but not derail the macroeconomic policy network.