Moody’s lifts Indonesia ratings as financial buffers improve

April 16, 2018

JAKARTA - Moody’s has upgraded Indonesia’s sovereign rating to Baa2 (stable outlook) from Baa3 (positive outlook) in what is the third ratings upgrade for Indonesia in less than a year. Fitch upgraded Indonesia to BBB/Stable outlook from BBB-/Positive outlook in December 2017, and Standard and Poor’s from BB+ to BBB in May 2017.

In a research note, ANZ Bank says that, while global themes remain the dominant driver of local markets near term, and headwinds for risk assets abound, it expects market participants to welcome the announcement with a silent cheer and see this as a nod of approval for the

Government's multi-year reform efforts.

 

ANZ says the overriding theme of the rationale behind Moody’s upgrade is a credible and effective policy framework in Indonesia which has ensured macro-economic stability and allowed for a build-up of financial buffers.

 

These include (1) maintaining the budget deficit and Government debt below the mandated levels of 3% and 30% of GDP respectively; (2) keeping headline CPI

within Bank Indonesia’s (BI) target range for three consecutive years; and (3) bolstering FX reserves.

 

Moody’s has noted that even though weak Government

revenues are a concern, the Government’s debt ratio of 30% is likely to stay below the median of 39% of GDP for all investment grade sovereigns, and 46.2% for

the Baa-rated median.

 

Moody’s has also forecast Indonesia’s External Vulnerability Indicator, which measures the ratio of long-term debt maturing over the next year and short-term external debt relative to the stock of FX reserves at 51.3% for 2018.

 

This level is viewed to be sufficiently protective.

 

Additionally, the rating agency is of the view that the economy is progressively diversifying its export base away from commodities to manufacturing.

 

 As a validation of this diversification, the share of

manufacturing exports increased to 72% of total exports in 2017 from 62% in 2013.

 

ANZ says it regards the build-up of Indonesia’s FX

reserves as a critically positive development.

 

“In our view, this has been a conscious policy decision aimed at mitigating the impact of portfolio outflows, should they occur,” it said.

 

“The benefits are already evident in the reduced volatility of the IDR.

 

“While this strategy has resulted in an under-valued currency, we draw comfort from the fact that inflation has remained contained. This is a departure from the past when IDR volatility resulted in higher inflation and inflation expectations.

 

Lower inflation is also, to a large extent, an outcome of BI’s and the Government’s efforts to improve logistics and information management across islands. That has mitigated problems such as food shortages.”  www.live.anz.com (ATI).