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Indonesia's sovereign credit upgrade: what it means for asset managers

Indonesia's sovereign credit upgrade: what it means for asset managers

Standard & Poor's upgrade of Indonesia's long-term sovereign credit rating from "BB" to "BBB-" has endorsed Manulife Asset Management's overweight position on Indonesia strategically.

In a statement, Endre Pedersen, CIO, fixed income (Asia ex-Japan) at Manulife AM said: 'We have been strategically overweighting Indonesia for several months across our Asian bond portfolios in anticipation of the upgrade by Standard & Poor’s.

'We have leveraged notable insights from our local fixed income team in Jakarta. Indonesian bonds have been a major contributor to the positive returns of our strategies, including in our Asia Total Return Bond and Asian Bond Absolute Return strategies over the past year.'

Besides receiving an upgrade for long-term sovereign credit rating from S&P, the country's short-term sovereign credit rating has also gained an upgrade to "A-3" from "B" from the rating agency.

According to S&P, the Indonesian authorities have taken effective expenditure and revenue measures to stabilise the country's public finances despite the terms of trade shock.

As a result, the rating agency expects net general government debt to stabilise near its current low levels as the budget deficit gradually declines.

Implication

According to Pedersen, Indonesia is in a good position with a compelling real GDP growth of 5% year-on-year, moderate inflation, a more stable rupiah, an improving current account, and a reformist government.

'The upgrade to full investment grade status means Indonesia would likely see inflows from clients who observe stricter credit requirements, such as Japanese investors.

'Indonesia’s ten-year local bonds are currently yielding 7% which is, in our view, compelling relative to other investment grade government bonds around the world.'

Fitch Ratings and Moody's

Fitch Ratings and Moody’s investors services awarded Indonesia investment grade status more than five years ago.

S&P gave Indonesia a positive outlook in May 2015 for President Joko Widodo's move to remove gasoline subsidies.

In June 2016, S&P denied Indonesia's investment grade, citing weak government revenue collection and worsening corporate credit quality.

S&P’s latest move is the first time since the Asian financial crisis that Indonesia’s sovereign bonds are rated investment grade by all three major rating agencies.

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