Indonesia has been enjoying the limelight for some time now as the darling of the international investment community. The country is widely perceived as a fast-emerging economy and a possible global economic heavyweight.
The country has posted robust economic growth for years, which has enabled the government to improve infrastructure, education and health care. Progress has also been made in other areas, but evidently it has not been sufficient.
In a wake-up call for both the country and the government, rating agency Standard & Poor’s cut its rating outlook on Indonesia’s debt to stable from positive, citing stalling of reform momentum and a weaker external profile. These factors have reduced the chance of an upgrade over the next 12 months.
One of the major factors contributing to the lowered outlook is the impasse in the country’s structural reforms as well as rising external debt and deficits in current account. It is telling that the agency noted that the government is fast losing its ability to maintain the country’s creditworthiness given the dual deficits. Tackling the current account deficit and the budget deficit must be a top priority.
At the heart of this is the amount of money the government is spending on fuel subsidies, which is expected to exceed $30 billion this year. It is imperative that the government move on this issue.
“Slow progress in improving critical infrastructure, along with legal and regulatory uncertainties and bureaucratic obstacles, detract from Indonesia’s growth potential, thus delaying poverty reduction and economic development,” S&P said. “Political considerations related to next year’s parliamentary and presidential elections appear to increasingly shape policy formulation.”
What this alludes to, is that the government is pursuing populist policies ahead of the elections. This may not be entirely true as the government has got many policies right. But the downgrade should not be taken lightly lest it snowball into a crisis.