Tuesday, May 14, 2013

Why so pessimistic about Indonesia?

CONFIDENT VIEWS. Stalling reforms and rising political risks have not deterred foreign investors to pour money into Indonesia, although recent economic slowdown and widening budget deficit will pose notable challenges for government officials. (From left to right) Finance Minister M. Chatib Basri, Industry Minister M.S. Hidayat, Bank Indonesia Governor Agus Martowardojo, Coordinating Minister for Economics Affairs Hatta Rajasa.

(photo by Nurhayati for The Jakarta Post)

Soon after international ratings agencyStandard & Poor’s (S&P) downgraded the outlook for Indonesia’s economy from “positive” to “stable”, economists and market analysts were quick in uproar, arguing that the economy might be heading into downhill.

Having been reluctant to grant Indonesia an investment grade status for its sovereign debt papers, the S&P instead gave the prestigious rating upgrade to the Philippines, dealing severe blow for Indonesia and its mission to pump in more investments that have become the country’s major growth driver in the last few years.

Facing economic slowdown and soaring budget deficit, Indonesia may soon lose its charm as the darling of overseas investors, so went warnings uttered by some economists.
However, the stories that went unnoticed from the S&P’s downgrade was the persisting optimism among foreign investors towards Indonesia, despite the downgrade in its economic outlook.

In theory, a downgrade in credit rating should directly affect demand for the government’s sovereign debt papers among investors, who first looked towards the official recommendation of ratings agencies before putting their money in a certain country.

Strangely, investors remained stubbornly queuing to invest in Indonesia’s debt papers. A government bonds auction on May 6 – held only two working days after S&P downgraded its outlook on Indonesia’s sovereign – was more than two times oversubscribed, with total incoming bids for the rupiah-denominated debt papers topping Rp 20.1 trillion (US$2 billion), far higher than the indicative target of Rp 8 trillion.

The yields only rose slightly in the auction. Bid-to-cover ratio (an indication of bonds’ demand among investors) for debt papers that mature in 15 and 20 years was more than 1.5, an indication that investors still have strong faith towards Indonesia’s long-term economic fundamentals.

Meanwhile, in the stock market foreign investors seemingly took S&P’s outlook downgrade as a laughingstock. The Jakarta Composite Index (JCI), whose players are more than 50 percent foreigners, continued its bullish trend by hovering at around 5,089 – an all time high – only a week after S&P’s downgrade was made public.

Apparently, investors saw that there are more reasons to be optimistic, rather than be pessimistic, about Indonesia’s economy.

It is a blatant fact that Indonesia does not really deserve to be left out in the cold by S&P, which instead turned to the Philippines for its choice of a country that has investment grade credentials.

Indonesia is Southeast Asia’s largest economy, boasting 250 million citizens, higher than the Philippines’ 95 million. Both the two economies are consumption-driven, but Indonesia – with population and middle-class numbers that are around three times higher than the Philippines – certainly guarantee more lucrative business opportunities for foreign companies looking to invest in the emerging market economies.

Amidst the prevailing global uncertainties, Indonesia boasts the status as the world’s most stable economies, with its robust household consumption successfully cushioning the country from external shocks. The country grew by average of around 6 percent over the last decade, with its economic growth never falling below 4.5 percent since President Susilo Bambang Yudhoyono took helm in 2004.

Compare that with the Philippines, whose period of high economic growth (it recorded 6.5 percent growth last year, higher than Indonesia’s 6.2 percent) was beset with volatility. Its gross domestic product (GDP) growth slumped to 1.1 percent in 2009, a case that highlighted the Philippines economy’s vulnerability towards risks stemming from the external environment.

In addition, Indonesia also has more ample fiscal space to boost its economic expansion in the medium-run, as its debt-to-GDP ratio currently stood at 23 percent, compared to the Philippines’ 41 percent.

According to the ease of doing business ranking published by the World Bank, Indonesia was ranked 128 last year, climbing from 131 a year earlier. In the same timeframe, the Philippines dropped to 138 from 136.

Numbers of people living below poverty line in Indonesia is currently around 12 percent of total population; in Philippines it is 28 percent.

Realizing these facts, Philippines newswire Interaksyon.com even threw cynicism to S&P’s decision to favor its country to Indonesia for a rating upgrade. It argued that, although the Philippines possessed the prestigious investment grade status, Indonesia would eventually still be the country hogging foreign investments coming into the region, thanks to its healthy macroeconomic indicators.

“Jakarta no doubt would love to have our grade,” the newswire wrote in its editorial. “However, our neighbors to the south will just have to make do with all those darned investments.”

It is fair to say that Indonesia’s era as a darling of foreign investors is not yet over, as at present it remains as the world’s least unattractive country amidst the prevailing global economic uncertainties.

President Yudhoyono has always called for optimism, urging people to think from the positive point-of-view, which is why we all should respond towards S&P’s downgrade not with excessive glumness. 

Instead, the downgrade in our outlook should be utilized as a wake-up call to ensure that we would not become lulled with all the bright economic indicators that we have been enjoying for years.

And what can also be taken into account from S&P’s downgrade is that our government officials really have no room for complacency. The suggestion is actually a very relevant thing to say to President Yudhoyono, whose indecisiveness on several pressing economic issues has so far caused Indonesia’s economy to punch well below its weight.

Critics frequently pointed out that Indonesia would still grow by more than 6 percent, even if the government does nothing to assist the economy. My suggestion to you, Mr. President: heed S&P's warnings seriously and start undertaking necessary policies to propel our economy -- you only have a year left to show that the country is not being run in autopilot.

This article was published in The Jakarta Post on Tuesday, May 14 2013

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