Moody’s revises Indonesia’s Baa3 sovereign rating outlook to positive

Moody’s has revised Indonesia’s sovereign rating outlook yesterday. It revised the nation’s Baa3 rating outlook from stable to positive. According to Moody’s the revision in the rating outlook was due to the nation’s reduced susceptibility to external shocks and rebounded track record of macroeconomic stability.

Moody’s decision was not unexpected. Economic fundamentals of Indonesia have rebounded in recent years. The country’s current account deficit has contracted to 2.1 percent of the GDP from 3.6 percent seen in the third quarter of 2013. The rise in prices of commodity has strengthened Indonesia’s trade surplus. Indonesia’s inflation at present has slowed to 3.5 percent from above 7 percent average seen between 2013 and 2015.

Significantly, policymakers continue to be committed to fiscal prudence and carry on undertaking economic reforms, indicating willingness to make the necessary decision, from executing the tax amnesty program in 2016 to the phased removal of electricity tariff subsidies that are taking place in 2017, noted ANZ in a research report.

Outflows from the Indonesian bond market was short-lived, while inflows resumed in December-January reaching a total of USD 2.2 billion, even as other markets in Asia continued to witness outflows. The Indonesian central bank, Bank Indonesia, used their foreign exchange reserves to smooth volatility in the rupiah. But it made sure that reserves were rebuilt rapidly when pressures eased.

Further progress in rebounding Indonesia’s resilience and indicating effectiveness in reform policies would increase the possibilities that the positive outlook of Moody’s gets changed into a rating upgrade. Fitch and Moody’s have Indonesia at investment grade and both now have their outlooks at positive. Standard and Poor’s is the only major credit rating agency that does not have Indonesia as investment grade.

“We believe it is only a matter of time before S&P follows through with an upgrade, given that they have had Indonesia on a positive outlook since May 2015”, added ANZ.