Market Overview

S&P Won't Upgrade Indonesia, Who Cares? (IDX, EIDO, IDXJ)


In late 2011, Fitch Ratings became the of the three major ratings agencies to restore Indonesia's investment-grade status after a 14-year stint spent in the credit purgatory that is junk status.

Moody's Investors Service followed in January, saying "Indonesia's cyclical resilience to large external shocks points to sustainably high trend growth over the medium term. A more favorable assessment of Indonesia's economic strength is underpinned by gains in investment spending, improved prospects for infrastructure development following key policy reforms, and a well-managed financial system."

"In addition, robust growth has been accompanied by the continued health of its external payments position, supported by increasingly large flows of foreign direct investment, while inflationary expectations are becoming better anchored at a more stable and historically lower level. Prudent fiscal management has contained budget deficits at very low levels and has reduced the government's debt burden as a share of GDP," the ratings agency added.

While the Market Vectors Indonesia Index ETF (NYSE: IDX) and the iShares MSCI Indonesia Investable Market Index Fund (NYSE: EIDO) have been somewhat disappointing this year relative to other Southeast Asian emerging markets ETFs, Indonesia is still a country with immense long-term economic potential.

Standard & Poor's, the only major ratings agency that still retains a junk rating for Indonesia, didn't get the memo. The ratings agency is grappling with Indonesia's inability to implement fuel subsidy cuts in the face of rising oil prices, according to Emerging Money.

Today, S&P praised Indonesia's strong economic fundamentals and soaring first-quarter foreign direct investment figures while reiterating a positive outlook on the country. But the fuel subsidy issue is the sticking point.

Investors in IDX, EIDO or the newly minted Market Vectors Indonesia Small-Cap ETF (NYSE: IDXJ) need not panic because of S&P's reluctance to remove Indonesia's junk status. IDX has been one of the best-performing non-leveraged ETFs since the March 2009 market bottom and most of those gains were accrued with all of the ratings agencies holding junk ratings on Southeast Asia's largest economy.

Not to mention, S&P has a history of being slow to downgrade problem countries, so it's no surprise it would be slow in upgrading a country with some promise. For example, the iShares MSCI Spain Index Fund (NYSE: EWP) had fallen from around $50 in late 2009 to $40 in early 2010 before S&P got around to downgrading that country. The iShares MSCI Italy Index Fund (NYSE: EWI) plunged nearly 40% between April and September 2011 before S&P got around to its downgrade of Italy.

Bottom line: Foreign direct investment in Indonesia is expect to soar this year and there is robust international demand for Indonesian bonds, indicating smart global investors might be putting little value on S&P's views on Indonesia's ratings.

For more on Indonesia ETFs, please click HERE.


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