Editorial: Rating Boost Fair, but More Still to be Done

27 December, 2011 | Source: Jakata globe

In affirmation of Indonesia’s continued economic progress, Fitch Ratings has upgraded the country’s long-term and local currency ratings to investment grade, a move that will further boost its standing among global investors.

The government has worked hard to ensure macroeconomic stability and the upgrade is a just reward. It is crucial that the country pushes on with its reform program and further strengthens its economic fundamentals.

Fitch noted that the upgrades reflect the country’s strong and resilient economic growth, low and declining public debt ratios, strengthened external liquidity and a prudent overall macroeconomic policy framework. The credit must go to both the Minister of Finance Agus Martowardojo and Bank Indonesia Governor Darmin Nasution for achieving such a healthy financial outcome.

One of the key factors behind the upgrade is the country’s strong foreign reserves, which now stand at about $110 billion. This has insulated the domestic economy and provided it with financial stability amid global economic uncertainty. The large foreign reserves have allowed the central bank to keep the rupiah relatively stable and lower interest rates — both of which have helped local businesses.

The ratings agency noted that although Indonesia’s liquidity ratio of 119 percent remains below the BBB median of 140 percent, its basic balance is expected to remain in surplus. This lessens the nation’s vulnerability to potential volatility in short-term capital flows.

While macroeconomic sustainability looks to be on sound footing, the same cannot be said for microeconomic progress. Infrastructure bottlenecks continue to hamper business growth and raise transportation costs. A poor education system is preventing a better skilled labor force from developing. Over the longer term, these factors will hold back economic expansion.

It is therefore crucial that the government uses its foreign reserves to develop infrastructure and invest in better schools. Only then will the country’s economy find itself on the path to long-term, sustainable growth.

 

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