Reaching an Eligible Investment Status

International credit rating agency Standard & Poor's, which had changed its name to S&P Global Ratings in April, announced on June 1 that the rating of Indonesia's debts was to be maintained at the BB+ level for the long term and at B for the short them.

BB+ means that the Indonesian government as a debtor has sufficient ability to pay its debts, while B means the obligation to pay debts has a high risk, or there is a possibility it will be unable to pay. The decision on the rating by S&P was based on the finding that the country's fiscal performance has not improved because the structural problems indicate, among other things, the failure of the government to achieve its tax revenue target in 2015 - specifically only collecting 81.5 percent of Rp 1.29 quadrillion.

Besides that, the budget deficit is predicted to expand by an average of 3 percent of gross domestic product (GDP) over the 2016 to 2019 period. Therefore, Indonesia failed to obtain the investment grade status from S&P that was expected by the government of President Joko "Jokowi" Widodo and businesses that were intending to invest in Indonesia.

The highest ratings of AAA, AA+, A, and A- that are given by S&P are expected by securities-issuing countries that are well able to repay the state securities. The ratings of AA+, A or A- help the securities-issuing countries to gain access to the international capital market. International investors and creditors have confidence when investing in countries with A ratings.

From this perspective, the disappointment of the Jokowi government with the S&P evaluation is understandable because the rating given by S&P may have made it difficult for Indonesia to get long-term loans with low interest rates.

Criteria for the rating

What actually are the criteria used by credit rating companies like S&P and Moody's to determine their ratings? Richard Cantor and Frank Packer in their study on "Determinants and Impact of Sovereign Credit Ratings" identify them as follows.

First is the income per capita. The greater the tax potential tax base of the borrower country, the greater the ability of the government to repay its debts. This variable represents the level of political stability and other important factors.

Second is the growth of GDP. A relatively high economic growth rate indicates the existing debt burden of the state will be easier to serve.

Third is inflation. High inflation indicates a structural problem in the government's finances. When the government seems incapable and does not want to cover the existing budget through taxes and securities, it has to choose inflationary financing. Public dissatisfaction over inflation could lead to political instability.

Fourth is fiscal balance. A large budget deficit absorbs domestic private savings and indicates the government does not have the ability and the will to collect taxes from its citizens to cover the existing budget or to pay its debts.

Fifth is the external balance. A large current-account deficit shows the public and private sectors are heavily dependent on foreign funds, which will eventually become intolerable.

Sixth is the level of economic development that is marked by the rise of per capita income and industrialization in the relevant country.

Seventh is a history of debt default. A country that fails to pay its debts is widely perceived as a country with a high debt risk.

According to Cantor and Packer, six of the factors play an important role to determine the country's security rating, namely income per capita, growth of GDP, inflation, external debts, the level of economic development and the history of debt default. A high per capita income, namely US$24,000 and upwards, a low inflation and external debt and a high level of economic development have become reasons to give the rating of AA/Aa to state securities. Meanwhile, a history of debt default limits the state debt rating to Baa/BBB, or below it, which means the ability to pay is adequate. If the systematic linkages between the rating and the fiscal policy or current-account deficits are not found, that is possibly because of an endogeneity problem.

Solutions

Observing the determinants of the credit ratings mentioned above, apparently the Indonesian government is still far behind and has to work harder to reach the investment grade rating from S&P. How then does the Indonesian nation and state address this reality?

First, we must acknowledge that the credit rating agents, among others Moody's, S&P and Fitch, have the role of giving information regarding economic and political risks and even legal issues to international financiers interested in buying debentures or other securities issued by a country. Therefore, the investment grade status given by them to a country greatly affects the international capital market. The credit ratings they issue can be said to represent the international capital market's view.

Second, it is worth criticizing the objectivity of the credit ratings issued by the credit rating agencies. As reported, the big credit rating agents like S&P, Moody's and Fitch are subsidiaries of large-scale investment banks and other commercial companies so that their objectivity is doubtful. Moreover, the fact that the credit rating industry is dominated by Moody's, S&P and Fitch reveals an oligopolistic character that invites public suspicion.

Academics, researchers, politicians and journalists believe the credit rating agencies have great responsibility for any global financial crisis. According to the US Congress, the credit rating agencies, including the investment banks, were primarily responsible for inflating real estate companies, which was followed by the collapse of the financial markets that caused a global recession.

Third, the credit rating agencies actually are part of an international market apparatus network that is laden with neo-liberal ideology. Behind it firmly stands large capital strength that limits the state's interventionist role and defeats national economic policy, even - up to a certain level - beating democracy for the sake of fulfilling the will of the market.

We have witnessed many cases when heads of state tried hard to adjust their national economic policies to the market's priorities, while leaving behind the objectives of their national development. In order to face the trap of the international market currents and the neo-liberalism ideology, we as a nation and state have to be consistent in pursuing the achievement of our national goals, namely poverty alleviation by using measurements in line with the value and dignity of human beings, redistribution of resources as a way to cope with economic and social disparities, protection of human rights and the environment and growth and political stability for the welfare of the entire people.

In order to realize it, consistency of national policy is needed to carry out the mandate of the Constitution, namely the Preamble and Article 33 of the 1945 Constitution.

by Abdul Hakim Garuda Nusantara

source Kompas, Thusrday, June 30, 2016 
Indonesian version can be read here