Navigating the Road to Improve Sovereign Credit Rating

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Indonesia has historically experienced volatile credit ratings, often lower than its Southeast Asian neighbors. Standard & Poor’s (S&P) rated Indonesia below investment grade until 2016, while Fitch and Moody’s assigned investment-grade ratings in 2011 and 2012, respectively. Since 2016, Indonesia’s credit ratings have steadily improved, reflecting enhanced economic stability and creditworthiness. Nonetheless, Malaysia and Singapore have significantly higher credit ratings, while Indonesia’s ratings are also slightly below Thailand and Philippines.

The factors determining a country’s sovereign credit rating by agencies like S&P, Moody’s, and Fitch include macroeconomic stability, fiscal policies, government debt, and economic performance. The key components include consistent economic growth, controlled inflation, and robust fiscal policies with manageable debt levels. Participation in Global Value Chain (GVC) also plays a crucial role by enhancing competitiveness through access to international markets and technology. Moreover, structural reforms that promote a favorable investment climate, economic openness to trade and Foreign Direct Investment (FDI), along with political stability and effective governance, are essential for a high sovereign credit rating.

In Indonesia, several main issues could hinder the accuracy in assessing the sovereign credit rating. First, the Indonesian economy is highly dependent on the commodity sector, making it vulnerable to global price fluctuations and heightening risk perceptions among international investors. Second, the low tax ratio in 2022 (10.39% of GDP) presents challenges in raising sufficient fiscal revenues to support public services and infrastructure. Third, the decline in regulatory quality due to uncertainty erodes investors’ trust in the stability of the business environment. Fourth, the lack of control over corruption affects government’s quality and investor confidence. Fifth, the persistent twin (current account and budget) deficits threaten economic stability. Sixth, low liquidity in the financial market resulting from suboptimal foreign exchange of exports proceeds (DHE). Lastly, the lack of effective communication between the Indonesian government and Credit Rating Agencies (CRAs) further hampers effective assessment.

To improve Indonesia’s sovereign credit rating, several strategic steps need to be taken by the government and other related institutions. First, reducing dependence on the commodity sector by promoting existing manufacturing industries as well as potential sectors to diversify the economy. Second, increasing the efficiency of tax collection through proper implementation of Law on Harmonization of Tax Regulations (UU HPP) and intensive tax awareness campaigns. Third, improving transparency and legal certainty in the licensing process to create a friendly and trustworthy investment environment. Fourth, enforcing regulations regarding corruption practices to make ensure integrity. Fifth, ensuring Balance of Payment (BoP) remains healthy by designing new incentives for foreign investors. Sixth,
increasing market liquidity by strengthening law enforcement regarding export proceeds. Lastly, maintaining active communication with international sovereign rating agencies to convey clear and reliable information regarding economic policies, financial stability, and national development progress. By implementing these strategies in a coordinated manner, Indonesia could accelerate its financial development and improve its sovereign credit rating.

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