Moody upgrades Indonesia to Baa3 investment grade

Thu, 01/19/2012 - 13:05

Following Fitch's sovereign rating upgrades back in December, Moody's Investors Service, one of the three biggest rating agencies in addition to Standard & Poor's, has on Wednesday released an update of Indonesia's sovereign rating to Baa3 from Ba1, upgrading Indonesia to investment grade.

The rating outlook is stable.

According to Assistant Vice President of the Moody's Analyst Sovereign Risk Group Christian de Guzman, some of the key drivers of the decision are Moody's anticipation that government financial metrics will remain in line with Baa peers, the demonstrated resilience of Indonesia's economic growth to large external shocks, the presence of policy buffers and tools that address financial vulnerabilities and a healthier banking system capable of withstanding stress.

Below are excerpts from Moody's press release.

"Indonesia's cyclical resilience to large external shocks points to sustainably high trend growth over the medium term. A more favorable assessment of Indonesia's economic strength is underpinned by gains in investment spending, improved prospects for infrastructure development following key policy reforms, and a well-managed financial system."

"In addition, robust growth has been accompanied by the continued health of its external payments position, supported by increasingly large flows of foreign direct investment, while inflationary expectations are becoming better anchored at a more stable and historically lower level."

"Prudent fiscal management has contained budget deficits at very low levels and has reduced the government's debt burden as a share of GDP. As a result, Indonesia's fiscal ratios now surpass many of its higher-rated peers, providing more fiscal headroom to respond to economic shocks. It has also reduced risk perceptions, enabling the government to access international funding markets even during periods of heightened risk aversion."

"Policy buffers, including the central bank's large stock of foreign exchange reserves and the government's bond stabilization framework, have been recently deployed and remain ample as significant lines of defense against destabilizing capital outflows. In addition, the banking sector does not pose immediate or significant contingent risks to the government's balance sheet, thereby raising fiscal headroom and added scope to policy responsiveness to future shocks."

According to Moody's, Issues related to governance and a fundamental assessment of institutional strength remains a concern in regard to a further improvement in Indonesia's credit fundamentals, though continued progress on targeted subsidy reform would be credit positive.

"The stable outlook also reflects the expectation of continued policy flexibility and the adept management of risks stemming from global financial market volatility, based in turn on the tepid recovery in the US and the ongoing sovereign debt stress apparent in the euro zone."

In response to the upgrade, Bank Indonesia Deputy Governor Hartadi Sarwono stated that Indonesia could become a haven nation for investors. Exchange data revealed that global funds bought $66 million more of Indonesian shares than those they sold soon after the upgrade.

Trade Minister Gita Wirjawan applouded the upgrade, stating Indonesia should be able to get 'A' grade rating in 2014.

Moody's also raised the country's long-term foreign currency (FC) bond ceiling to Baa2 from Baa3, while the long-term FC deposit ceiling was aligned with the government bond rating at Baa3. In addition, the short-term FC bond and deposit ceilings were upgraded to P-3. Moody's outlook for these ceilings is stable.

The local currency bond and deposit ceilings were also upgraded to A3 from Baa1.

According to Moody's, some factors that could lead to an upgrade includes the increase in fiscal space resulting from improved revenue mobilization; continued health of the country's balance of payments and the financial system, coupled with a longer track record of monetary and price stability; sustained progress in addressing infrastructure bottlenecks that contribute to an increase in potential growth; or a gradual deepening of local capital and credit markets to support the onshore finance-ability of the government's borrowing requirements.

Factors that could lead to a downgrade includes sustained loss of inflation control and monetary stability or a large shock to the country's fiscal, debt and foreign currency reserve position, derived, for instance, from policy mismanagement, or some other domestic political shock, which results in a deep deterioration of resident and investor confidence. (eaz)

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