A day after slashing interest rates, Indonesia's central bank governor on Friday called on the government to address some fiscal concerns on revenue and subsidies to win an investment grade rating from Standard & Poor's. Bank Indonesia (BI), which has been under pressure from the government to ease policy to boost growth in Southeast Asia's largest economy, on Thursday cut its key rate for the third time this year to 6.75 percent. Now, Governor Agus Martowardojo is putting the ball back in the government's court.
Martowardojo said the government has to explain revenue and subsidy concerns in order to get Standard & Poor's to upgrade the country's credit rating to investment grade, which could reduce borrowing costs. He said Indonesia is attracting capital flows in line with improving economic conditions, with inflation and the current account deficit under control although fiscal concerns are obstructing a ratings upgrade.
"Fitch and Moody's have given us investment grade but S&P's (upgrade) is held back. I am sure (S&P's) is observing," said Martowardojo. He said an explanation is needed on "whether the government is going to cut spending or increase bonds issuance" if state revenue falls below expectations.
The World Bank said it expects the government to miss its 2016 revenue target by 275 trillion rupiah ($20.99 billion). Martowardojo also said the government needs to set up a mechanism to determine retail fuel prices after it removed subsidies at the start of 2015. Last year, the government set fuel prices at what state energy firm Pertamina said were below market prices, forcing the company to shoulder the difference at a loss. Fitch and Moody's gave Indonesia investment grade ratings in 2011 and 2012. S&P's changed its credit rating outlook for Indonesia to positive in May 2015 but has yet to give it the coveted investment grade status.
An investment grade from S&P's would help reduce Indonesia's risk premium and bring down government bond yields, Kartiko Wirjoatmojo, Bank Mandiri's finance director, told Reuters in an interview last week. Wirjoatmojo said banks compete for the same pool of funds as government bonds, and a reduction in bond yields would mean banks can also bring down the interest rate they offer for deposits, helping them to then lower lending rates. The government wants commercial banks to offer a 9 percent lending rate to companies at the end of this year, down from the current average of 12 percent. That was one of the reasons it has asked BI to consider cutting its policy rate to 4-5 percent.