Indonesia's jump to investment grade rests on policy & fiscal reform improvements

Fitch sees limited potential for 'contagion' to Asia, in spite of investors' concerns on some high-debt sovereigns.

"Emerging Asia weathered the global recession well, compared with other regions, partly reflecting improvements in credit fundamentals before the crisis, supporting regional sovereign credit outlooks in general,' says Andrew Colquhoun, Fitch's Director of Asia Sovereign Ratings at Bisnis Indonesia office, today.

On Indonesia specifically, Fitch upgraded the country to 'BB+', a notch below investment grade, in January 2010 primarily in recognition of the improvements to sovereign credit-worthiness arising from fiscal policy discipline and falling debt ratios.

Low government tax revenues, however, remain a rating weakness. The ratings remain on Stable Outlook. Making the jump to investment grade will depend on continued strengthening in the policy framework, including demonstrating monetary and price stability. Reforms to raise fiscal revenues and improve economic fundamentals would also support Indonesia's credit profile.
The outlook for Asian companies and financial institutions appears to be brighter too compared to their peers in Western Europe and the US, according to Tony Stringer, Fitch's Head of Asia-Pacific Corporate Ratings and Brett Hemsley, Head of Asia-Pacific Financial Institution Ratings.

The impact of the global economic downturn was relatively contained in most South East Asian economies, and most banks' performance in these countries was quite resilient.

"Even as asset quality slightly deteriorated and credit costs rose modestly, these were fully absorbed by the banks' pre-provision earnings leaving their capital positions intact,' notes Ambreesh Srivastava, the agency's Senior Director of Asian Financial Institutions Ratings.

"Indeed, several Indonesian banks' ratings were raised after a similar upgrade to the sovereign rating in January 2010. Although raising fresh equity to fund loan growth and meet more onerous capital requirements in future will remain a challenge, improved macroeconomic prospects provide a supportive environment for bank performance,' adds Mr. Srivastava.

The majority of Asia Pacific structured finance ratings is expected to be stable, except Japan CMBS and Australia non-conforming RMBS.

"Japan's commercial mortgage backed securities (CMBS), with significant rating actions in 2009 and negative underlying asset performance in 2010, continues to have a Negative rating Outlook, given the weak economic recovery," says Stan Ho, Senior Director and Head of Non-Japan Asia Structured Finance.

"Rising interest rates in Australia are also expected to increase the rating pressure on non-conforming residential mortgage backed securities (RMBS) and CMBS there,' Mr. Ho adds.