Reward for Indonesia’s Renaissance

Posted on January 18th, 2011 at 3:34 pm by Akhyari


Indonesia’s transformation from economic basket case to powerhouse continues apace. Moody’s Investor Services has upgraded the country’s sovereign credit rating to just one step below ”investment grade”.

Severely battered by the Asian financial crisis in the late 1990s, Indonesia struggled for many years to shake off its reputation in capital markets as unstable and a major investment risk.

But, after weathering the 2008 global financial crisis and posting growth in excess of 6 per cent last year, Indonesia’s economy is set to expand at an even more impressive rate this year and join the ranks of China, India and Brazil as investment darlings.

If the economic gains can be secured, the geopolitical ramifications are significant, especially for Australia, the country’s near neighbour. Indonesia is the world’s fourth largest country, friendly to the West and one of the few nations to embrace democracy in the past decade or so. It also has the world’s largest Muslim population.

Yesterday’s rating increase from Ba2 to Ba1 by Moody’s is the highest for Indonesia since the 1998 Asian economic crisis that hit Indonesia harder than any other nation and led to the ousting of the long-serving dictator Suharto.

”In 1998, it was a political crisis as much as an economic one,” Fauzi Ichsan, a senior economist at Standard Chartered Bank, said. ”The biggest worry then was about the integrity of Indonesia as a country, that it would go the way of Yugoslavia and the Soviet Union and fragment. There was a lot of sectarian and ethnic violence across the archipelago.

”But regional autonomy and democracy, for all its flaws, has produced political stability that has enabled this economic growth to happen.”

Moody’s cited the country’s prospects for continued growth, sound budgetary position, improving debt position and foreign currency reserves, and the increase in foreign direct investment inflows as reasons for yesterday’s upgrade.

A higher credit rating reduces the cost of borrowing for governments and encourages foreign investment.

Many economists expect Indonesia’s rating will lifted another notch to an investment grade level as early as this year, although Moody’s cautioned that risks remained. While there are growing concerns about soaring prices, Moody’s focused on a stalled reform agenda.

The government of President Susilo Bambang Yudhoyono is a coalition that includes Golkar, the political vehicle of Suharto. It represents the business and bureaucratic elites. It is widely seen as blocking efforts to clean up the country’s endemic culture of graft and reforming a bloated and corrupt bureaucracy.

Responding to criticism about the faltering anti-graft movement, Dr Yudhoyono said yesterday that he would take a more interventionist role, starting with the infamous case of tax official Gayus Tambunan.

Dr Yudhyono ordered the fast-tracking of the investigation and prosecution of those officials and companies involved in corruption at the tax office and a financial audit of all institutions touched by the scandal.


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