As Indonesia's Sovereign Debt Gets Upgraded, $5 Billion Worth of Inflows Expected 1

Indonesia is heating up

Indonesia (EIDO) is one of the most favorable investment destinations for fund managers currently. Last week, S&P upgraded the country to investment grade on proposed budget curbs. According to the rating agency, the current fiscal policy and economic conditions are leading to lower risk in the country which opens it up for a wider range of investments. In the past two years, Indonesia’s position in emerging market economies has strengthened despite low commodity prices. The government has also focused on structural economic, fiscal, and economic reforms to boost investments in the private sector.

Fund manager Ameli Renani is “overweight” on Indonesia given its political stability and favorable fiscal and economic reforms. The country’s current account deficit was in bad shape five years ago but is now in control. “Its [the government’s] fiscal deficit is quite small, around 2% of gross domestic product, and it has implemented some very successful policies. One of them is the tax amnesty programme, which has managed to attract a significant amount of Indonesians’ offshore assets. Currently it still has one BB+ credit rating left, which we expect to be raised to investment grade by the end of the year,” says Ameli-Renani.

Indra Mawira, fund manager at Panin expects the S&P upgrade to attract $5 billion to $10 billion worth of inflows to Indonesia’s bond markets. Further, this will help Indonesian companies to gain access to lower cost of funds. In the longer run, this is positive for interest rate sensitive sectors like banks, real estate, and Automotives.

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As per Bloomberg data, in 2017 so far, fund managers have plowed $2.1 billion into Indonesia’s equity markets and $6.3 billion in its bond markets.

According to Alan Richardson, a Hong Kong-based fund manager at Samsung Asset Management, “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.” Goldman Sachs expects the S&P upgrade to generate $5 billion worth of inflows to Indonesian funds.

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