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NEWS UPDATES Asean Affairs        18  March 2011

Indonesia could reach investment grade in a year

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Indonesia may see its sovereign ratings upgraded to investment grade in less than 12 months, a top executive from Fitch Ratings announced on Thursday.

Fitch raised the country's BB+ ratings outlook from positive to stable in February, citing its economic growth and a lower public debt ratio. BB+ is one notch below investment grade.

"Typically our outlook has a 12- to 18-month lifetime, but it's not necessary to wait," Andrew Colquhoun, head of sovereign ratings in the Asia Pacific for Fitch, said on Thursday at an investors' seminar. "The 12- to 18-month time frame shouldn't be taken too literally or loosely. We're not saying we will wait definitely 12 months."

He put the chances of a ratings upgrade following the positive outlook at 60 to 70 percent. An investment-grade rating would put Indonesia on par with large, emerging economies such as Brazil, India and China.

"The positive outlook, putting Indonesia on the cusp of investment grade, reflects the country's economic resilience, recent improvement in external liquidity and strengthening fiscal solvency measured by declining public debt ratios," Colquhoun said.

Indonesia's economy grew 6.1 percent last year and is forecast to expand 6.5 percent this year. The nation's debt-to-gross domestic product ratio shrank from 28 percent in 2009 to 26 percent last year.

Fitch also pointed to rising official foreign reserves as building a buffer against global shocks, though it advised authorities to remain cautious in managing surges in short-term capital inflows.

Indonesia's foreign exchange reserve rose to more than $102 billion as of March 10 as the central bank bought US dollars to ease the volatility of the rupiah. Its foreign reserves stood at $96.2 billion in 2010, up from $66.1 billion in 2009.

Fitch sounded a note of caution on inflation, though, saying one of Indonesia's traditional weaknesses poses risks in the short term.

Colquhoun warned the agency might revise the outlook back to stable "if inflation picks up and is out of control or there is some shock that affects the domestic economy in a negative way."

He also said the structural economy needed improvement. Reducing the nation's low average income, widespread corruption as well as tackling infrastructure hurdles were seen as key to improving the investment climate.

According to Fitch's presentation, the ratio of government capital expenditure to GDP in 2010 was just 3 percent, lower than China, Brazil and India at 4 percent. "Structural reforms to tackle these would strengthen the case for an upgrade," Colquhoun said.

Coordinating Minister for the Economy Hatta Rajasa said Indonesia should reach investment-grade in the third quarter.

"I think to wait 12 months, based on our performance, is too slow. This year, we should have investment grade in the third quarter. They should see how we manage our monetary, fiscal policies, investment climate and how we improve our competitiveness," Hatta said.

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