The decision by S&P Global Ratings to raise Indonesia to investment grade has the potential to boost inflows and support the record rally in its benchmark index as corporate valuations improve.
S&P Global Ratings raised the credit rating to BBB- from BB+ with a stable outlook, bringing it in line with the other two main rating companies. The upgrade could fuel an additional 7 percent rally in the Jakarta Composite Index after the gauge reached a record Friday, according to Panin Asset Management.
The benchmark gauge surged 2.6 percent to 5,791.884 at the close Friday, its steepest advance since Aug. 1, led by gains in banks, consumer suppliers and shares of state-owned companies. The upgrade could lure an additional $5 billion to 10 billion to the bond market of Southeast Asia’s largest economy, Indra Mawira, a fund manager at Panin, said.
“This will enhance the recovery story of Indonesia this year and improve investors’ sentiment even further.” Mawira said in a telephone interview from Jakarta. “In the longer run, Indonesian companies will be able to access lower cost of funds and this is positive, particularly for interest-rate sensitive stocks such as banks, automotive and property companies.”
After the upgrade, Mawira expected the Jakarta Composite to rise to 6,200 by the end of this year compared to his previous target of 6,000. His Panin Dana Maksima fund returned 13.5 percent in the past year, beating 86 percent of its peers, according to data compiled by Bloomberg.
State-owned PT Telekomunikasi Indonesia added 5.1 percent on Friday, providing biggest boost for the Jakarta gauge. PT Bank Mandiri jumped 6.2 percent, leading rally among lenders. Tobacco company PT Gudang Garam rose 6.2 percent.
S&P’s decision comes on the back of a successful tax amnesty that earned the government more than $11 billion in revenue, helping to ease pressure on the budget and pay for much-needed infrastructure projects. The economy, which grew at a faster pace in the first quarter compared to the previous three months, has also being buoyed by a rebound in exports and strong consumer spending.
Foreign funds have bought $2.1 billion net of Indonesian equities this year, already exceeding last year’s total of $1.26 billion, according to data compiled by Bloomberg. Inflow to the bond market has reached $6.3 billion as the yield on the benchmark government bond fell by more than 90 basis points to 7.04 percent.
Alan Richardson, a Hong Kong-based fund manager at Samsung Asset Management said S&P’s decision will “help Indonesia achieve faster long-term growth” as it should attract more foreign direct investments. It will also attract more inflows to its $456 billion equities market.
“The waning reflation trade in the U.S., a weaker dollar and less interest in other emerging markets like Brazil will make Indonesia a ‘magnet’ for foreign fund buying.” Richardson said.