Editorial

A woman walking past steel reinforcement rods at a construction site in North Jakarta. (Photo: Yudhi Sukma Wijaya, JG)

Editorial: Economic Upgrade Reflects Wise Policies

Reflecting Indonesia’s continued economic resilience in the face of a global economic slowdown, international ratings agency Fitch has upgraded the nation’s long-term foreign and local currency rating one notch from BB- to BB. The upgrade was not unexpected given that Indonesia was one of only a handful of economies worldwide to post positive growth in 2009.

As the ratings agency points out, the country’s ratio of public debt to GDP has continued to decline, falling to 30 percent, while its foreign reserves rose to $66 billion as a result of prudent policies.

Indonesia’s sovereign creditworthiness is backed by its strong public finance track record relative to its peers. The good news is that the country’s current macroeconomic path and fiscal policy framework indicate that there could be further improvements in its currency rating. This will allow the government to tackle tough developmental issues and address infrastructure constraints that have hampered investment and economic competitiveness.

Another major point that should be noted is that Indonesia has fared well in managing capital flows despite its relatively shallow capital markets. The economy is thus better placed than before to handle abrupt capital outflows caused by sudden changes in the global economic outlook.

Indeed, as department store chain PT Matahari Putra Prima’s Rp 8 trillion ($856 million) strategic alliance with leading global private equity firm CVC Capital Partners fully illustrates, investors continue to be attracted to the opportunities available in this country. It is one of the strongest signs so far of foreign investors’ interest in Indonesia. Matahari’s bold strategic move is not only beneficial to the company, it will add depth to the country’s capital markets and improve overall economic sentiment.

The alliance is a perfect start to the year for Matahari and the Indonesia Stock Exchange (IDX). CVC is a global investor and its decision to invest significant sums in Indonesia bodes well for the economy. Matahari will use the funds to expand by rolling out 150 new stores over the next 10 to 15 years, in the process creating thousands of new jobs, supporting the growth of small- and medium-sized enterprises and increasing government tax revenues.

Indonesia needs many more such corporate deals to continue on its upward economic trajectory. Foreign investment is vital to economic expansion and corporate growth. Higher sovereign ratings will attract more foreign funds, creating a virtuous cycle that will raise living standards and incomes.

It is a pity, however, that the country’s sovereign ratings are not higher, owing to the current political situation, which has caused some investor jitteriness. This has prevented us from taking full advantage of the favorable conditions the country finds itself in.