Fitch
rating and our opportunity
Iwan Ungsi, a civil servant and graduate student at S.
Rajaratnam School of International Studies, Nanyang Technological University,
Singapore
Sumber : JAKARTA POST, 28 Desember 2011
After 14 years of improvement, the investment
grade for Indonesia has finally been reinstated. Fitch, an international
credit rating agency based in New York and London, rates Indonesia’s long-term
foreign and local currency issue default rating at triple-B-minus, with a
stable outlook. This assignment regains the nation’s position prior to the
Asian financial crisis in 1997.
How does the rating exactly affect us and our
journey as a developing country? Can we be easily satisfied and be proud about
this rating? Exploring the answers to these questions in further detail may
provide us with a clear insight to the outcome of this rating for our country.
A previous study by Ferri, Liu, and Stiglitz
(1999) points out that the credit rating agency plays a significant role in the
financial market. Changes in ratings from these rating agencies in the
downgrading or upgrading of sovereign debt below or above investment grade may
bring dramatic impacts to a country’s investment activities, as these ratings
to directly affect the pool of investors.
According to Fitch’s current sovereign rating
history list, Indonesia’s sovereign rating ranked at the same level as India’s,
one notch above Portugal’s and even more surprisingly, higher than some
European countries that recently struggled in the debt crisis.
Conversely, rating changes revisited due to
the recent global financial crisis in some countries may spark a strong adverse
reaction from the countries in question. One such example is the recent
downgrading of the US’ investment grade based on the future outlook of the US’
sovereign credit rating. US President Barack Obama felt it necessary to clarify
the change in ranking by quoting famously: “the United States of America will
always be a triple ‘A’ country”.
Indonesia gained its recent investment
upgrade ranking due its success in managing its debt-to-GDP ratio from 100
percent, as an outcome of the 1997 Asian financial crisis, to an impressive
reduction 26 percent.
On Fitch’s website a full explanation is
given to how sovereign ratings are derived, and most importantly, how the
established basis, criteria and methodologies are continuously evaluated and
updated. These ratings are widely used in financial sector practices, commonly
known as investment grade ratings ranging from AAA to BBB and from BB to D.
Bankers, investors and other financial
players frequently take into account sovereign (corporate) debt ratings when
considering cross border investment decisions. The increase in the sovereign
rating tends to reduce the country’s risk exposure, signifying a decrease in
borrowing costs as well, not only for the government but also for those
elements of the private sector interested in investing. This explains how the
upgrade in rating is usually followed by an increase in the amount of capital
inflows for both portfolio and foreign direct investment and vice versa.
A quantitative work conducted by Graciela
Kaminsky and Sergio Smuckler (2002) shows impacts of changes in sovereign
ratings on a country’s risk and stock market. It is also noted in this study
that a sovereign rating upgrade will reduce a country’s risk of investment and
financial market rallies.
Conversely, a downgrade will increase a
country’s risk and create a downturn in the stock market.
In the last decade or so, Indonesia endured
the consequences of a downgraded ranking. Losing its investment upgrade in
December 1997, its rating dropped and hit a low B minus in April 1998, before
bouncing back gradually in 2003. The country had limited opportunities to fully
showcase its true investment potential to the international community because
of its high investment risk.
Now that Indonesia has passed the investment
grade threshold, its chances to enhance the economy are wide open. Trade
minister and chairman of the Indonesian Investment Board Gita Wirjawan
says the rating upgrade will boost the country’s FDI figures by at least 1
percent of GDP, equivalent to US$9 billion, from the previous level. (The
Jakarta Post, Dec. 17, 2011)
Better international perceptions may offer
excellent momentum and should be optimized to support further growth of the
country’s economy. However, the real challenge is how to maintain the
international perception and transform it into a game changer, utilizing it to
tackle the foremost constraint of developing countries: a lack of capital
needed to support growth. Simultaneously, with our new regulation on tax
holidays and the recently passed bill on land acquisition, the investment grade
will lure more capital for infrastructure development.
In parallel, at the micro level, the investment
grade will also provide better options for banking and financial institutions
to access various sources of capital. Banks will be able to cut their cost of
funds and lower their interest rates, and as a result, support further lending
in business and investment activities.
But one must constantly remember and should
not remain complacent in achieving Indonesia’s ultimate goal. We need to remain
resilient in resolving our country’s fundamental problems.
Awarding the recent investment grade to
Indonesia, Fitch restated the urgency to resolve the country’s long-standing
structural weaknesses, namely overburdened infrastructure and corruption. As
Charles Kenny (2006) and many other scholars stated, both are intrinsically
connected. These scholars were able to correlate the impacts of Indonesia’s
corruption to be inversely linked to the poor quality of Indonesia’s
infrastructure.
Full and bold commitments are needed from all
stakeholders in order to resolve our country’s problems, not only to conform to
further upgrading from the credit rating agency, but most importantly, to
accomplish social welfare and present better living to all Indonesians.
We are doing better, but we are still far
from what we should be able to achieve.●
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