Shamim Adam & Novrida Manurung, Singapore – Indonesia's push to lure investment is at risk from "policy slippages" such as the failure to cut fuel subsidies, said Standard & Poor's, the only company with a non-investment-grade rating for the country.

"If the government's subsidy spending alters the fiscal outcome or markedly deteriorates the quality of expenditure or if policy measures deter fresh foreign direct investment, then the ratings could stabilize at the current level," S&P said in a summary analysis released on Friday after its officials visited the country last month.

Indonesia is seeking to return its S&P rating to the highest level since the 1997-98 Asian financial crisis, which would underscore the country's progress since it needed an International Monetary Fund bailout.

President Susilo Bambang Yudhoyono's efforts to contain the budget deficit were hindered last month by the House of Representatives rejection of an immediate increase in subsidized-fuel prices.

"As long as there's no fuel-price increase, Indonesia's rating won't be upgraded by S&P as the rating company needs to see that the government has a good discipline to maintain its fiscal health," said Fauzi Ichsan, senior economist at Standard Chartered in Jakarta. "We expect the government will raise the price of subsidized fuel maybe in July."

Indonesian lawmakers last month rejected the government's proposal for a 33 percent increase in subsidized-fuel prices from April 1, instead allowing it to raise rates only if the Indonesia Crude Price exceeds the state budgetary assumption of $105 a barrel by 15 percent over a six-month period.

The government now plans to reintroduce a proposal to limit sales of subsidized fuel, and is drafting a regulation that may ban private cars with an engine size greater than 1,500 cubic centimeters or 2,000cc from buying subsidized gasoline or diesel, Energy and Mineral Resources Minister Jero Wacik said last week.

"We have detected some policy slippages, after a remarkable decade of entrenching democracy following the collapse of the Suharto administration," S&P said. "The abandonment of a planned electricity tariff rise, the inability to implement fuel subsidy cuts despite rising oil prices, and a host of proposed or actual policy measures in industry and trade, point to a rising level of policy uncertainty."

Such a policy environment puts at risk the recent strength of investment, it said. "The report seems to suggest that S&P still sees some factors that may delay its anticipated credit rating upgrade," said Gundy Cahyadi, an economist at Oversea Chinese Banking Corp. in Singapore.

"We don't think it is a signal that they will not raise Indonesia's rating, but just a cautionary take that policy risks still play a role in determining Indonesia's risk profile going forward."

Yudhoyono won upgrades from Fitch Ratings and Moody's Investors Service that brought Indonesia to investment grade in the past year as he pledged to contain the budget deficit and allocate funds to infrastructure.