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S&P Upgrades Indonesia's Sovereign Credit

The international ratings agency Standard & Poor's has upgraded its assessment of Indonesia's ability to repay its debts, potentially making the country a more attractive investment target.

Standard & Poor's on Wednesday raised Indonesia's long-term foreign-currency sovereign credit rating by one grade, from 'B' to 'B plus', and hiked its local currency rating by two grades, from 'double B' to 'B plus'. This means that in Standard & Poor's opinion, Indonesia is in better shape than before to repay its debts in both foreign and local currencies.

The improved rating should make Indonesia a more attractive target to outside investors, and should make it possible for the government and Indonesian companies to obtain new loans at lower interest rates. The upgrades were a reward for the considerable progress Indonesia has made over the past six months in economic stability, fiscal management and the lowering of debt. S&P also said the upgrades were an acknowledgment of the country's successful recent elections, and its enhanced political stability.

However, the agency warns that Indonesia still has work to do. It said Indonesia's policy of fuel subsidies, which soak up 15 percent of total government spending, need to be cut, and it says some of the savings should be channeled to improvements in the country's crumbling infrastructure.

Fauzi Ichsan is the vice president for Global Research at Standard Chartered Bank in Jakarta. "It is an indication that the government or the country is moving in the right direction," said Fauzi Ichsan. "Of course this upgrade doesn't mean much because Indonesia is still five notches below investment grade, but at least as I said, the country is moving in the right direction, and investors can give the benefit of the doubt."

S&P's vote of confidence represents something of a vindication for the new Indonesian president, Susilo Bambang Yudhoyono, who was criticized for his appointment of a businessman with a questionable credit history as his coordinating minister for the economy. Of all the Southeast Asian economies, Indonesia has been the slowest to recover from the regional financial crisis of the late 1990s.

Analysts say that is partially due to the economic legacy of the regime of now-disgraced President Suharto. They also say that intervening governments have done too little to tackle some of the more entrenched political problems.