Soon after international ratings agency Standard & Poor’s (S&P) downgraded the outlook for Indonesia’s economy from “positive” to “stable”, economists and market analysts were quick to protest, arguing that the economy could go downhill. Having been reluctant to grant Indonesia an investment grade status for its sovereign debt papers, S&P instead gave the prestigious rating upgrade to the Philippines, dealing a severe blow to Indonesia and its mission to attract more investment, which has been the country’s major growth driver in the last few years. Facing an 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 story that went unnoticed was the persisting optimism among foreign investors toward Indonesia, despite the S&P downgrade of its economic outlook. In theory, a downgrade in credit rating directly affects demand for a government’s sovereign debt papers among investors, who first look at the official recommendations of ratings agencies before putting their money in a certain country. Strangely, investors stubbornly continued to line up to invest in Indonesia’s debt papers. A government bond auction on May 6 — held only two working days after S&P downgraded its outlook on Indonesia’s economic outlook — 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 the demand for bonds among investors) for debt papers that mature in 15 and 20 years was more than one and a half, an indication that investors still had strong faith in Indonesia’s long-term economic fundamentals. Meanwhile, on the stock market, foreign investors seemingly did not take S&P’s outlook downgrade too seriously. The Jakarta Composite Index (JCI), more than 50 percent of whose players are foreign, continued its bullish trend by hovering at around 5,089 – an all-time high – only a week after S&P’s downgrade was announced. Apparently, investors saw more reasons to be optimistic than being 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 chose the Philippines for its investment grade credentials. Indonesia is Southeast Asia’s largest economy, boasting 240 million citizens, higher than the Philippines’ 95 million. Both economies are consumption-driven, but Indonesia’s — with its population and middle class around three times bigger than the Philippines — certainly guarantees more lucrative business opportunities for foreign companies looking to invest in emerging market economies. Amid the prevailing global uncertainties, Indonesia boasts a status as one of the world’s most stable economies, with robust household consumption successfully cushioning the country from external shocks. The country’s economy has grown by an average of 6 percent over the last decade, and has never fallen below 4.5 percent since President Susilo Bambang Yudhoyono came to power 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 Philippine economy’s vulnerability toward risks stemming from external conditions. In addition, Indonesia also has greater fiscal space to boost its economic expansion over the medium term, as its debt-to-GDP ratio currently stands at 23 percent, compared to the Philippines’ 41 percent. In terms of the ease of doing business, a list published by the World Bank last year put Indonesia at 128, climbing from 131 a year earlier. In the same time frame, the Philippines dropped to 138 from 136. The number of people living below the poverty line in Indonesia is currently around 12 percent of the total population, while in the Philippines it is 28 percent. In view of these facts, Philippines newswire interaksyon.com was cynical about S&P’s decision to favor its country over Indonesia for the rating upgrade. It argued that, although the Philippines possessed the prestigious investment grade status, Indonesia would still be the country winning foreign investment 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 the darling of foreign investors is not yet over, as at present it remains the world’s least unattractive country amid the continuing global economic uncertainties. President Yudhoyono has always called for optimism, urging people to think from a positive point-of-view, which is why we should not respond to S&P’s downgrade with excessive gloom. Instead, the downgrade should be seen as a wake-up call to ensure that we do not become lulled by all the bright economic indicators that we have enjoyed for years. Moreover, the S&P downgrade shows that there is no room for our government to become complacent. This is a timely reminder for President Yudhoyono, whose indecisiveness over several pressing economic issues has caused Indonesia’s economy to punch well below its weight. Critics have frequently pointed out that Indonesia’s economy would still grow by more than 6 percent, even if the government did nothing to assist the economy. My suggestion to you, Mr. President, is this: Heed S&P’s warning seriously and start introducing the necessary policies to propel our economy forward; you only have a year left to show that the country is not being run on autopilot. The writer is a journalist with The Jakarta Post.