Ardian Wibisono

Foreign Currency Income, Infrastructure ‘Keys to Rating Upgrade’ for Indonesian Debt

Increasing foreign currency income and improving the nation’s infrastructure would be the most effective ways for the government to achieve an “investment grade” rating on its debt, economists said on Friday.

Peter Jacobs, the central bank’s head of foreign debt analysis and international relations, said international rating agencies consider debt from countries with low foreign exchange income riskier.

“Looking at several indicators, such as debt to GDP and foreign share of government debt, we are actually already worthy of being upgraded to investment grade,” Peter said. “However, where we have a hard time is with our FX [foreign exchange] income to GDP.”

Purbaya Yudhi Sadewa, chief economist with the state-run Danareksa Research Institute, said infrastructure development is the key to the country attaining an upgrade to investment grade.

“They want to see our government demonstrate seriousness in improving infrastructure and solving infrastructure-development problems. If that can be done then the other criteria will be easily met,” Purbaya said.

The government has made developing the national infrastructure a top priority, and last month announced the formation of a $3.4 billion development fund. However, the primary problem, vague and often conflicting regulations on the acquisition of land for development projects, has yet to be solved.

Fitch Ratings last month upgraded the country’s sovereign debt to BB+ from BB with a “stable outlook,” citing the country’s resilience amid the global financial crisis and good management of the state budget.

Indonesia is now only one step away from reaching Fitch’s investment grade rating. The rating reflects the perceived risk in lending to the government. Therefore, if it is raised the government would be able to borrow at lower interest rates.

Peter said that according to Fitch data, Indonesia’s debt-to-GDP ratio and the share of government debt held by foreigners are both similar to those of countries with investment grade ratings, and acceptable to Fitch.

However, Indonesia lags well behind in foreign currency income, a situation that must be remedied, he said.

“There is no other option other than to increase export receivables, income from workers working abroad and foreign direct investment,” he said, without offering specific data.

“The way to increase FX income is to develop infrastructure for exports and convince investors to invest here,” he added.

Meanwhile, the country is still two notches below investment grade according to Moody’s Investor Service, and three levels below according to Standard and Poor’s.

“We expect S&P to increase their rating since they had given positive outlook for Indonesia,” Peter said.

Your View

See Result