S&P revised down Indonesia’s outlook to stable from positive

Surprisingly, S&P – the only prominent rating agency that has not yet upgraded Indonesia to investment grade – downgraded Indonesia’s outlook from positive to stable with current BB+ rating retained yesterday. At the same time, ironically, S&P upgraded the Philippines to investment grade (BBB-)

S&P’s decision to downgrade Indonesia’s outlook was a combination of several factors such as slow progress on infrastructure, policy and bureaucratic uncertainties. It also stated external credit fundamentals had weakened owing to rising private sector external borrowing and structural external imbalance.

However, we believe S&P’s decision to downgrade Indonesia’s outlook was mostly owing to government’s reluctance to deal with fuel subsidy problem that was likely its constraint in the first place to upgrade Indonesia last year. Just as we have mentioned on our previous report, despite the president’s decision to increase subsidized fuel price, his statement on the conditionality of the hike still leaves big uncertainty about the plan.

What should be watched after this? We do not think it will have significant impact to domestic growth. Instead, it will affect financial market and the rupiah fluctuations. Following S&P’s statement on 2 May13, the JCI reacted negatively as it fall 1.3% on the day. Meanwhile, the 10-year government bond yield increased 2bps to 5.54% (3 week high) and the rupiah reached Rp9,745/US$ (nearly four week low) on the corresponding period.

Is there any potential risk other rating agencies would follow? For information, S&P’s decision is based on an assessment done by a visiting team to many Indonesian officials last month. Moody’s and Fitch have done their assessment 3-4 months ago and thus for the moment we believe that the probability for them to change their outlook or rating is low. Nevertheless, if in fact the government take no significant action regarding fuel subsidy in the second semester just as promised.

Nevertheless, S&P may raise its rating if reforms are implemented, especially on the subsidized fuel issue.

For Indonesia Market Summaries, 3 May 2013.