The decision on Friday by the rating agency, S&P, to upgrade Indonesia to investment grade rating was long overdue. At under 30% of GDP, Indonesia has one of the lowest levels of government debt in the region. Last year the government demonstrated its commitment to fiscal prudence when it cut government spending sharply in order to keep the budget deficit below 3% of GDP. The other two main rating agencies, Fitch and Moody’s, upgraded Indonesia to investment grade in 2011 and 2012 respectively. Government bond yields could in theory fall, as the bond market is opened up to a greater pool of potential investors. However, we are doubtful yields will fall much further, if at all. The decisions of rating agencies typically tend to lag rather than lead the markets. The recent experience of Hungary and the Philippines, where bond yields fell sharply prior to their upgrade to investment status, support this view.
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