Indonesia upgraded by Moody's

Indonesia's sovereign credit rating is raised to Ba1, one notch below investment grade, by Moody's Investors Service.

Indonesia continues to garner international approval. Yesterday, Moody’s Investors Service upgraded the country’s sovereign credit rating by one notch to Ba1 and assigned it a stable outlook.

Moody’s pointed to Indonesia’s continued economic resilience, stronger macroeconomic balance, and improved public debt position and central bank currency reserve adequacy.

The agency also believes that the prospects for foreign direct investment inflows are improving, which “is expected to fortify Indonesia's external position and economic outlook”.

Moody’s initiated its recent review on December 1, 2010. The decision means that the rating by Moody's is one level higher than that assigned by Standard and Poor’s, but the same as the BB+ awarded by Fitch Ratings a year ago. It is also just one step away from investment grade.

As well as improving economic ratios and credit metrics, the Indonesian government has shown an ability to manage domestic political challenges to its reform agenda without damaging key policy institutions' effectiveness, Moody's said.

"We have upgraded the sovereign credit ratings as the momentum in the economy is expected to be sustained by steady domestic demand, a reasonable pace and sequencing of policy and structural reforms, and  rising foreign direct investment," said Aninda Mitra, Moody's lead sovereign analyst for Indonesia. “Furthermore, the country's debt position and reserve adequacy remain on an improving trajectory relative to most of its ratings peers," he added.

Although sovereign credit metrics might improve, there are uncertainties caused by changes in the banking supervisory framework. In addition, inflation is rising and there are dangers from large speculative capital inflows.

On the positive side, Mitra pointed to the deepening of Indonesia’s capital markets and the recent proposal for the creation of a "bond fund", both of which “could slowly begin to enhance the government's onshore debt finance ability".

The bigger risk remains the country’s politics. In particular, opposition from coalition partners has slowed the government's drive to implement important economic reforms, but, so far, this hasn’t “impacted overall policy management capabilities or near-term economic prospects”.

If obstructions impede policymaking, then that could hurt investor confidence and hence financial stability. However, Moody’s thinks this is unlikely.

A further upgrade is possible if there is a greater assurance of continued monetary and price stability and soundness of bank supervision, as well as a gradual deepening of local capital and credit markets to support the government's onshore debt finance-ability, and  further inflows of foreign direct investment to support the external balance of payments.

Meanwhile, incipient inflation – which has already sent the stockmarket down this year – needs to be tackled and investor confidence needs to be maintained.

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