Indonesia: Investment flood after rating upgrade while infrastructure and graft cause concern

Updated On: Jan 20, 2012

This week, Moody’s Investors Service upgraded Indonesia’s credit rating to investment level for the first time since 1997, when the Asian financial crisis hit the country and landed it a junk rating. The move follows a similar upgrade by Fitch Ratings last December, and Standard & Poor’s is expected to follow suit. As a result, foreign direct investment in Indonesia hit a record US$20 billion last year, in the midst of a bleak global economy, and despite investors’ complaints about poor infrastructure and widespread graft in the nation.

Moody’s upgrades Indonesia to investment ranking

The rating upgrades by Moody’s and Fitch Ratings confirm that Indonesia has returned to good form after its heavy losses in the 1997 Asian financial crisis. At that point in time, Indonesia saw a net outflow in foreign direct investment as interntional companies closed up shop in the country. As a result, Moody’s gave the country junk rating, which has now been upgraded from Baa3 to Ba1, which is the lowest investment grade—a level shared by India. Standard & Poor’s is expected to update its investment for the rating soon enough.

Trade Minister Gita Wirjawan claims the country can achieve ‘A’ grade rating by 2014, an announcement met by skepticism from many sides who bemoan the country’s infrastructure, prevalent graft and slow bureaucracy. While the new ratings upgrade by Moody’s is expected to lead to further investment in the country, some analysts think there will not be a sudden surge in investment in the country, due to those problems.

Both Moody’s and Fitch said any further ratings upgrades will depend on Indonesia’s capacity to battle its infrastructure bottlenecks and corruption problems.

Bright futures: investours pour in as currency, bonds benefit

Foreign direct investment in the country hit 175 trillion rupiah (US$19.3 billion) last year. Singapore was the top foreign investor in Indonesia, followed by Japan, the United States, as well as the Netherlands and South Korea. It is quickly beating countries like Thailand in amount of FDI, although it remains well behind China, which leads with $116 billion in FDI in 2011.

With a population of 237.6 million, Indonesia has attracted about the same amount of investment as giant India, and is Southeast Asia’s biggest economy, according to The Straits Times. Investors have been lured by the country’s strong economic expansion and relative political stability. In seven out of the last eight years, Indonesia’s GDP has expanded by 5% or more each year. Next year, it is slated to grow by 6%, and inflation fell to 3.79% at the close of 2011, which has eased fears that the fast-growing economy may overheat. The country’s economy has benefitted from a boom in exports of commodities like coal and palm oil, as well as a relatively healthy financial balance sheet. The country’s ratio of public debt to gross domestic product has plunged from over 90% in 2000 to 25% today.

Wall Street Journal has observed that Indonesia seems “happily out of step with the global economy,” but noted that although domestic consumption constitutes over half of the country’s GDP growth, Indonesia’s future success is tied to the fluctuations of the regional economy. In a survey by Standard Chartered, 60% of Indonesian business leaders cited the importance of China to the country’s economy.

The Indonesian government seems similarly wary. Indonesian Trade Minister Wirjawan has stated that the country will maintain its target of Rp 290 trillion in total investment, considering the continued global economic crisis. In 2011, total investment in the country hit 251.3 trillion rupiah (US$27.6 billion), exceeding the year’s 240 trillion rupiah target.

Earlier this month, Indonesia sold 30-year bonds at a record low yield, and the rupiah, which has been Asia’s lowest performing currency, ended the day today 0.7 percent higher.

Report: Foreign Direct Investment in Indonesia Soars (The Wall Street Journal, 19 January 2012)

Report: Indonesia's China Syndrome (The Wall Street Journal, 19 January 2012)

Report: Indonesia Wins Second Rating Upgrade, Aiding Investment (Bloomberg BusinessWeek, 19 January 2012)

Report: Indonesia's foreign direct investment hits record (Channel News Asia, 19 January 2012)

Report: Moody's upgrades Indonesia's debt (Business Times, 19 January 2012)

Report: Indonesia draws US$19b FDI in 2011, tops Malaysia (The Malaysian Insider, 20 January 2012)

Report: FDI rises to $19b amid global woes (The Jakarta Post, 20 January 2012)

Report: Experts Weigh in on Indonesia's Infrastructure Needs (The Jakarta Globe, 19 January 2012)

Report: Indonesia Gets Ratings Boost (The Wall Street Journal, 20 January 2012)

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