Indonesia, Philippines Face Hurdles in Gaining Investment Grade - S&P

From Wall Street Journal
Oct 19, 2012

Standard & Poor's Ratings Services is on the threshold of raising the credit ratings for Indonesia and the Philippines to investment grade, but the ratings firm said the upgrades may take some time because the countries need to implement further reforms.

S&P rates both Indonesia and the Philippines at BB-plus, just one notch below investment grade. It affirmed Indonesia at that level in April with a positive outlook and raised the Philippines to that rating in July with a stable outlook.

"The positive outlook on Indonesia recognizes ongoing improvement in the government's balance sheet and the country's income metrics. A modest improvement in the country's political and policy dynamics--combined with Indonesia's other credit attributes--could lead to an upgrade," said S&P credit analyst Agost Benard in a statement.

Indonesia is already at investment grade by Fitch Ratings and Moody's Investor Service reckoning, while the Philippines is a notch below the coveted rating in Fitch's standard and two notches below that by Moody's assessment.

S&P said that aside from the lack of policy initiatives to promote long-term growth during President Susilo Bambang Yudhoyono's second term that started in 2009 and a slew of measures or policy proposals that appear to raise roadblocks for foreign investors, the Indonesian government has also abandoned a planned electricity tariff increase and been unable to cut fuel subsidies in the face of rising oil prices. A widening trade deficit only added to the less favorable view, it added.

The Indonesian government has said it would continue efforts to reduce energy subsidies, which weigh heavily on its budget deficit and were cited by S&P in April when it decided to affirm Indonesia at BB-plus instead of raising it to investment grade. Analysts, however, have said that there will continue to be strong political opposition to increase prices for subsidized fuel after a plan to do so in March triggered violent street protests.

For the Philippines, Finance Secretary Cesar Purisima has often complained that credit rating firms are behind the curve, noting that financial markets already rate Philippine debt at least two notches above investment grade.

"Our higher appraisal of the government's fiscal stance came in addition to the ongoing strengthening of external liquidity indicators, long a rating strength for the Philippines, the report said.

It also pointed to the Philippines' other strengths: remittances from a well-diversified overseas labor force, a fast-expanding business process outsourcing industry, and a vibrant goods trade. It said the surpluses have proven resilient during the period of global downturn.

But while fiscal management is a rating strength for Indonesia, S&P pointed out as a rating constraint the Philippines' weak fiscal profile and its high interest burden on public debt due to a narrow revenue base and the large portion of expensive commercial debt.

"For both sovereigns, though, their low per capita income levels remain a rating constraint. The wealth levels in Indonesia and the Philippines imply a low revenue base for the government to draw on, significant human and physical capital shortcomings, and hence less fiscal and political flexibility to modify policy to avoid default in the event of adverse economic developments," it said.

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