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NEWS UPDATES Asean Affairs        26  February 2011

Fitch revises Indo outlook to positive

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Fitch Ratings upgraded Thursday Indonesia’s sovereign rating outlook to BB+ positive from BB+ stable mainly thanks to favorable macroeconomic prospects, paving the way for the country to secure investment grade in the course of one year.

“The positive outlook reflects Fitch’s view that Indonesia’s favorable macroeconomic prospects are likely to see the credit profile strengthen further over the next 12 to 18 months, despite near-term risks from inflation and potentially volatile capital flows,” Andrew Colquhoum, Fitch’s director and head of Asia Pacific sovereign ratings, said in a statement.

The BB+ rating with positive outlook is one notch below investment grade, which would attract more investment to Southeast Asia’s biggest economy. Faster progress in low tax take, infrastructure deficiencies and corruption would further support the case for an upgrade, he added.

“Long-standing weaknesses in economic and credit fundamentals including deficiencies in physical infrastructure and a high reported prevalence of corruption weigh on the ratings. Faster progress in tackling these would help secure Indonesia’s prospects for sustained growth and would support the ratings.”

In the statement, Fitch cited Indonesia’s economic growth, government debt to GDP ratio and foreign reserves as the positive sides of the country’s economy, but mentioned inflation as a threat to the economy’s expansion.

Foreign reserves swelled to a record US$96.2-billion high as of end of December 2010. The country’s economic growth exceeded estimates in 2010, reaching 6.1 percent on significant growth in investment as well as strong exports and domestic consumption. The debt to GDP ratio also fell to 26 percent by year-end, “well below” other country’s, Fitch said.

But as the economy expands and with surging food prices, inflation reached a 20-month high of 6.96 percent at the end of 2010, exceeding the government’s 5.3 percent and the central bank’s 6 percent target.

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