S&P Downgrades Ratings Outlook of Indonesian Debt

Standard & Poor’s cut its ratings outlook on Indonesia’s debt to stable from positive, signaling that a stalling of reform momentum and a weaker external profile have reduced the chance of an upgrade over the next 12 months.

Local stocks tumbled, with the benchmark index falling 1.3 percent to 4,994.05 on Thursday, while the rupiah came under increased pressure.

The government has less leeway for unpopular polices, Agost Bernard, an S&P analyst, said in a statement on Thursday.

Aside from the absence of structural reform, external debt and current account deficits had diminished the potential for a ratings upgrade, according to the S&P statement released before the market close at 4 p.m. in Jakarta.

The ratings agency, though, maintained its BB+ rating on the nation’s long-term notes and B assessment on Indonesia’s short-term securities.

Fitch Ratings and Moody’s Investors Service raised their rating on Southeast Asia’s largest economy to investment grade in December 2011 and January 2012, respectively, meaning only S&P is keeping the country below investment grade.

“Slow progress in improving critical infrastructure, along with legal and regulatory uncertainties and bureaucratic obstacles, detract from Indonesia’s growth potential, thus delaying poverty reduction and economic development,” S&P said.

“Political considerations related to next year’s parliamentary and presidential elections appear to increasingly shape policy formulation,” it added.

Reactions in Jakarta diverged, with economists noting that the government’s failing attempts to stem fiscal hemorrhaging caused by  consumption-linked subsidy spending threatened to unbalance the budget while shortchanging infrastructure and health care needs.

But President Susilo Bambang Yudhoyono has insisted that fuel prices cannot go up unless the legislature first agrees on a welfare net for the poor.

“This is a pinch from S&P for government to speed up subsidies reform,” Destry Damayanti, chief economist at Bank Mandiri, told Jakarta Globe.

She added the ratings agency downgrade would slow portfolio inflow to the country, as most global investment institutions stuck to investment grade destinations. “While sudden outflow is unlikely, inflow potential is also limited.”

As a result, the rupiah would be expected to remain under pressure this year, in line with a current account deficit linked to weak exports and robust fuel imports. The rupiah has declined 0.5 percent so far this year.

Foreign holdings of Indonesian bonds, though, rose 6 percent to Rp 298.7 trillion ($30.7 billion) on Thursday from Rp 280.7 trillion at the end of March. That signals offshore investors’ appetite to hold Indonesian high-yield assets, including bonds.

Standard Chartered Indonesia economist Eric Alexander echoed Destry, saying the cut could curb foreign investors’ appetite for bonds. But he said that foreign direct investment would continue flowing in “due to the size of the market.”

Hatta Rajasa, the coordinating minister for the economy, said that while market confidence in Indonesia remained high, the outlook revision sent “a signal that there’s still a lot to be done” and was “a reflection of our stance on subsidized fuel.”

He denied that politics was behind the government’s snail-paced move to cut fuel subsidy spending.

“There are no politics. The issue of subsidized fuel is purely centered on our effort to see a healthier economy … [and a] fair and resilient society,” he said.

S&P, though, cited how a “weakening policy environment may ultimately have a negative impact on growth prospects and … generally sound economic conditions.”

In a separate announcement, S&P also cut the outlook for four Indonesian companies due to their strong government interdependency. They were Pertamina, the state oil and gas company; Perusahaan Gas Negara, the country’s largest gas distributor; state-controlled lender Bank Negara Indonesia; and Lembaga Pembiayaan Ekspor Indonesia, also known as the Indonesia Eximbank.

Meanwhile, S&P moved the Philippines to investment grade on Thursday, in a nod at its improving external profile and decreased reliance on foreign currency debt.