Healthy Fiscal Conditions, Growth Prospects Support Indonesia's Investment Grade Rating: Moody's

The Ministry of Energy and Mineral Resources said on Monday (05/03) that it has scrapped 186 regulations in the energy and mineral resources sectors that were considered troubling. (Antara Photo/Sigid Kurniawan)

By : Adinda Normala | on 7:35 PM February 07, 2018
Category : Business, Economy, Featured

Jakarta. Moody's Investors Service, one of the "Big Three" global credit rating agencies, said Indonesia's healthy fiscal and economic prospects support a positive outlook of the country's sovereign credit rating.

In a report released on Tuesday (06/02), Moody's asserted its positive outlook for Indonesia's Baa3 credit rating – the lowest notch in an investment grade rating category. The agency last upgraded the country's rating in 2012.

"The credit profile of Indonesia [Baa3 positive] is supported by narrow fiscal deficits, low government debt ratios, the large size of the economy and its healthy growth prospects," Moody's said in a statement that accompanied the report.

The report said the outlook for Indonesia's growth remains stable, with real gross domestic product growth likely to hover around 5.2 percent to 5.3 percent in 2018, thanks to steady private consumption and a rise in export growth.

The Indonesian economy grew 5.07 percent last year, the highest since 2014, with nominal GDP at Rp 13,558 trillion ($950 billion).

The rating agency also applauded the administration of President Joko "Jokowi" Widodo for various efforts to gradually streamline the country's complex regulatory environment to lure more investment. It said those efforts have "translated in improvements in investor perceptions and a pick-up in fixed capital formation, although investment growth is still below peaks."

Moody's also applauded the government's "strong adherence" to limiting fiscal deficits, which has kept the debt burden in check.

"Commodity prices that are higher than troughs and the continued stability in growth and investment have resulted in a buildup of external buffers," Moody's said.

Still, the agency also highlighted challenges that may affect Indonesia's credit rating, such as the government's low revenue mobilization and a reliance on external funding.

Data from Bank Indonesia showed that as of November last year, the country's external debt stood at $347.3 billion, having increased 9.1 percent from the previous year. The private sector's contribution is $170.6 billion, having increased by 4.2 percent, while the public sector contributed $176.6 billion, which represents a 14.3 percent increase.

"Moody's would consider upgrading the Baa3 sovereign rating if Indonesia showed further progress in sustainably reducing external vulnerabilities, while at the same time demonstrating enhanced institutional strength. One positive indication of this development would be a reduction in the government's reliance on external debt," Moody's said in the statement.

It added that a downgrade of Indonesia's rating is unlikely, "given the positive outlook." However, Moody's also mentioned some of the downside risks of the country's credit profile. This include "if evidence built up that the nascent institutional strengthening is on hold, or reversing."

It also highlighted other risks, including if the rating agency perceives that the Indonesian government may be unable to improve its revenue performance, or if it changed its expectations of the country's growth outlook, and if there are external shocks that may increase the likelihood of weakening fiscal, debt or balance of payments.

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