Indonesia's sovereign upgrade triggers heavy windfalls

Moody's lists down the far-reaching boons of their recent lifting of Indonesia to investment grade.

Indonesia will become a more attractive investment option, says Moody's Investors Service, and will get access to cheaper financing options. Key sectors that will surely benefit are oil and gas, utilities, telcos, media, mining and real estate.

These gains though may be hindered by persistent risks in corporate governance, regulation and corruption.

"Whilst the immediate rating implications from the upgrade have been moderate, we expect the wider environment for Indonesian corporates toimprove in the medium- to longer-term," says Nidhi Dhruv, a Moody's Analyst, who presented the Moody's report entitled "Indonesian Corporate Issuers Will Benefit From Sovereign Upgrade -- But Only Gradually."

"Indonesian corporates will, over time, benefit from cheaper and more diverse funding opportunities, more foreign direct investment, and a more stable and predictable operating environment as the result of improved transparency, a more predictable legal framework, and progressive policy initiatives," adds Dhruv.

"At the same time, the report notes that an element of policy uncertainty and other risks remain. Specifically, Indonesia has ongoing issues regarding corporate governance, regulation, and corruption, while elections in 2014 also introduce a degree of uncertainty regarding continuity of the reform agenda," said Moody's in a release.

"Moreover, Indonesian corporates remain largely family controlled businesses which tend to have less transparent operations and disclosures. Of the Moody's-rated Indonesian corporates, 20 of the 22 non-government related issuers have concentrated family ownership structures," it said.

"Moody's also notes that the potential for ratings uplift varies from sector to sector due to a range of factors, including competition, regulation, size and scale. The oil and gas and utility companies have been first to benefit because of their strategic importance and government links. Moody's would also expect some issuers in the telecommunication and media, mining and real estate industries to benefit from the effects of the sovereign's upgrade in the medium-term, while it may take longer for the benefits to trickle down to rated issuers in the agriculture and cement industries," it added.

"On the issue of funding, the report says that improved investor confidence will encourage Indonesian corporates to tap the capital markets. Large corporates are likely to find the cost of funding through bond issuance more attractive than bank loans," it said.

"The sovereign upgrade also comes at a propitious time for Indonesian corporates with foreign currency earnings, as offshore rates are low and investor interest in Indonesia may be spurred by the upgrade to investment grade. This development will encourage some bond issuance as corporates lock-in long-term funding at the low rates," it said further.