Euler Hermes' ASEAN CEO on how the election of President Joko Widodo could prove a boon for the Indonesian economy.
Euler Hermes has upgraded Indonesia's country rating to 'B2', citing well-received results of the July presidential elections and robust domestic consumption in 2014.
The new elected government is considered as a credit positive in view of the announced infrastructure plans and progress with growth-oriented reforms. Political uncertainties have been reduced and hence exchange rate volatility has receded.
The grading is based on the economic environment, the quality of the business climate and the likelihood of political hazards via a country grading system. On a six-level scale running from AA to D (AA being the highest and D the lowest) the country grade indicates the likelihood of non-payment by a company in a given country, which is a relevant factor in many business decisions.
Current growth momentum in Indonesia is perceived at a slower, but healthier level. Macro-economic fundamentals, such as relatively low level of government debt, comfortable amount of foreign currency reserves, have been improved, underpinned by the large scale of economy, which reveals enormous potential for trade credit flows.
However, corporate governance and lack of transparency still remain a concern. The new elected President Joko Widodo is expected to drive the reforms further in order to foster domestic investments.
According to Mahamoud Islam, senior Asia economist at Euler Hermes, Indonesia's government is expected to "focus on raising national savings to finance domestic investment, speed up business environment reforms and a rise in infrastructure expenditures to make the country more attractive for long term investors".
Islam adds this will also reduce the dependence on short term capital inflows, which might increase vulnerability to exchange rate shocks.
Economists at Euler Hermes expect the country's GDP growth to reach 5.2% for the full year 2014 and 5.8% in 2015.
Public finance indicators are considered at adequate levels and their dynamics as sustainable. Its demographic landscape that features a large young population, abundant natural resources and a track record of solid fiscal policies continue to play in Indonesia's favour.
Indonesia has also shown stronger resilience to external shocks as proven during the last global financial crisis. Nonetheless, natural disasters, rising pressure on the local currency, risks of capital outflows and lack of infrastructure compared to its regional peers such as Malaysia and Thailand present downside risks.
Victor Jiang, pictured,is CEO, ASEAN at Euler Hermes
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