Moody's: Two key constraints on Indonesia's government rating show signs of easing

Moody's Investors Service says that Indonesia (Baa3 positive) is showing emerging signs of a reduction in structural constraints. In particular, the country has become less exposed to external vulnerabilities and policy effectiveness is improving.

Moody's conclusions are contained in its just-released credit analysis titled "Government of Indonesia - Baa3 Positive" and which examines the sovereign in four categories: economic strength, which is assessed as "high (+)"; institutional strength "low (+)"; fiscal strength "moderate (+)"; and susceptibility to event risk "low".

The report constitutes an annual update to investors and is not a rating action.

On Moody's assessment that Indonesia's vulnerability to external shocks is declining, Moody's says the country's balance of payments has strengthened, despite low commodity prices and bouts of volatility in capital flows. This development is partly the result of a shift in monetary policy towards preserving macroeconomic stability — by focusing away from short-term growth — and a revision in fuel subsidies.

Moody's points out that Indonesia has maintained a track record of fiscal discipline, while the government has pursued structural economic, fiscal and regulatory reforms. However, these reforms have yet to provide a significant boost to private sector investment.

Moody's says that Indonesia's Baa3 government rating incorporates credit strengths, such as the size of the country's economy and its robust growth performance relative to those of similarly rated peers, low government indebtedness, and a stable banking system that poses limited contingent risks.

Credit challenges include a narrow revenue base, weak rule of law and control of corruption and the government's reliance on external funding.

Moody's would consider upgrading Indonesia's ratings if the country shows further progress in reducing external vulnerabilities and makes additional strides in improving the strength of its institutions, as demonstrated by a reduction in the government's reliance on external debt, and tangible evidence that reforms foster investment, competitiveness or sustained increases in revenues.

A downgrade of the ratings is unlikely, given the positive ratings outlook. Moody's could revise the outlook to stable if the nascent institutional strengthening is put on hold or reverses, there is a lack of improvement in revenue performance, the country's growth outlook weakens relative to similarly rated peers, and fiscal, debt, or balance of payments metrics weaken significantly.