by Win ThinThe Japan Credit Rating Agency (JCR) has raised Indonesia's foreign currency debt rating to an investment grade BBB-. Although JCR decisions usually don't garner much attention, we think this upgrade is important given rising Japan investor interest in Indonesia. Our own sovereign ratings model has Indonesia at BBB+/Baa1/BBB+ compared to actual ratings of BB/Ba2/BB+. Among the three major U.S. ratings agencies, Fitch's BB+ is the closest to our view, while Moody's raised the outlook on its Ba2 to positive last month. We think the JCR upgrade to BBB- will be followed by steady upgrades by the major agencies, and Fitch could move to an investment grade BBB- too before the year is over. Indonesia can be seen as the Brazil of Asia, offering high yields against a backdrop of strong economic growth. Foreign equity investment in Indonesia year to date is up 300% from the same period in 2009, behind only Vietnam, even as foreign equity investment in Korea, Taiwan, and Thailand year to date is down compared with the same period in 2009. The rupiah (IDR) is the third best performer in emerging markets year to date and is behind only the Colombian peso (COP) and Malaysian ringit (MYR). The 9000 level has proven tough to crack, but if risk appetite continues to pick up, it's only a matter of time before it breaks. When it breaks, the next important level will be the May 2007 low of 8650, but markets will be very nervous as the IDR strengthens as we believe the risk of more capital controls rises if it breaks 9000. We note that high yields and a policy rate of 6.5% coupled with strong economic fundamentals have made Indonesia one of the top investment destinations this past year, especially with the rest of Asia offering such low yields. That is slowly shifting as more and more Asian central banks hike rates, but Indonesia is starting off with a high yield advantage. Although Indonesian officials have been quite dovish, the market is looking for the first hike in the fourth quarter, of 25 basis points.
Malaysia was the first country in Asia to hike rates outright back in March, and has hiked by 75 basis points total to 2.75%. The Bank of Thailand just hiked for the first time, by 25 basis points, to 1.5%; the Bank of Korea started hiking this month with a 25-basis-point hike to 2.25%; India started tightening in March and has hiked by a total of 75 basis points to 4% so far this year; Taiwan hiked last month by 12.5 basis points to 1.375%; and the Monetary Authority of Singapore tightened policy back in April by allowing greater Singapore dollar (SGD) appreciation. Given such strong GDP numbers reported for the second quarter, we expect another round of tightening by Singapore's MAS in October. China, Indonesia, and the Philippines are the only major emerging-market countries in Asia that have not started tightening. The Philippines' central bank meets Thursday and is expected to keep rates at 4%, but the market sees a 25-basis-point hike in the third quarter and another 25-basis-point hike in the fourth quarter. Lastly, China releases a slew of data Thursday, and if the economy remains strong, we believe an official rate hike will be seen in the second half of the year.