S&P raises Indonesia FC rating to 'BB+' from 'BB'; outlook positive - Reuters

Standard & Poor's Ratings Services said today it had raised its long-term foreign currency sovereign credit and debt ratings on the Republic of Indonesia to 'BB+' from 'BB'. The outlook is positive. At the same time, Standard & Poor's affirmed the 'B' short-term foreign currency rating. We also affirmed or maintained the following:

"The rating upgrade reflects continuing improvements in the government's balance sheet and external liquidity, against a backdrop of a resilient economic performance and cautious fiscal management," said Standard & Poor's credit analyst Agost Benard. "Rating constraints include Indonesia's low per capita income, structural and institutional impediments to higher economic growth, and relatively high inflation. In addition, the country remains vulnerable to external shocks partly because the domestic capital markets are shallow; but this risk has lessened."

Indonesia's steadily improving public balance sheet underpins the rating. Consistent primary fiscal surpluses which exceed the debt stabilizing level are driving the falling debt ratios. This reflects the large margin by which economic growth exceeds the real interest rate, as well as some privatization proceeds and currency appreciation.

With the additional effect of sustained high nominal GDP growth, net general government debt has declined to 24% of GDP in 2010, which compares favorably to most peers'.

Similarly, as sustained balance of payment surpluses elevated foreign exchange reserves to equal about six months of current account payments, Indonesia's external liquidity risk now compares well to rated peers'.

The ratings on Indonesia remain constrained by the country's still-significant reliance on and exposure to external funding,which is evidenced by a relatively high net external liability position of about 100% of current account receipts. The low level of economic development is an additional rating constraint. Per capita GDP doubled to US$3,037 in the six years to 2010, which is significantly below the median for the 'BB' rating category. Infrastructure shortfalls, legal uncertainties, corruption, and labor market rigidities remain key obstacles in achieving a higher growth path.

"The positive outlook reflects the likelihood of an upgrade if inflation is tamed while
balance sheet improvements continue, likely in combination with successful implementation of parts of the administration's fiscal, administrative, and structural reform agenda," said Mr. Benard.

We may raise the ratings if inflation pressure diminishes, the external debt burden declines, the sovereign's balance sheet improves, or reforms such as subsidy rationalization suggest that fiscal and external vulnerabilities are further reduced. Conversely, a stalling of reforms or the absence of timely and adequate policy responses to renewed fiscal or external pressures would result in the rating stabilizing or weakening.

Standard & Poor's also affirmed or maintained the following:
-- The 'BB+' long-term and 'B' short-term local currency sovereign credit ratings;
-- The 'axBBB+/axA-2' ASEAN regional scale rating;
-- The 'BBB-' transfer and convertibility risk assessment; and
-- The recovery rating of '3' on Indonesia's senior unsecured foreign currency debt. This rating signals our expectation of a meaningful recovery of 50%-70% in the event of a default.