In a statement released on Wednesday (08/02) Moody's Investors Service said Indonesia's outlook upgrade to "positive" was due to the improving level of external vulnerability and strength of the nation's institutions; institutions that have been focused on the implementation of reforms in order to enhance the overall investment and business climate. The Baa3 rating is the lowest notch for investment grade debt.

Although Indonesia remains vulnerable to external shocks, Moody's believes that this vulnerability is on the decline despite falling prices of its main commodity exports. This diminishing vulnerability is expected to continue in the foreseeable future as local authorities have been eager to curtail the current account deficit, boost the nation's foreign exchange reserves and encourage slower rise in private sector external debt.

Furthermore, Moody's praised Indonesia's improving policy effectiveness, reflected by structural macroeconomic stability and fiscal discipline, together with gradual yet ongoing progress on structural economic, fiscal and regulatory reforms. In the foreseeable future, Moody's expects the Indonesian economy to grow higher compared to most of its Baa-rated counterparts. Earlier this week it was announced by Indonesia's Statistics Agency (BPS) that Indonesia's GDP growth reached 5.02 percent (y/y) in full-year 2016, a bit below analysts' estimates.

Read more: Economic Growth Indonesia: GDP at 5.02% in 2016, Not Good, Not Bad

In order to be awarded another rating upgrade, Moody's emphasized that Indonesia would need to achieve further progress in reducing external vulnerabilities, while at the same time demonstrating enhanced institutional strength. Meanwhile, in case Indonesia would show stagnation with regard to the reduction of external vulnerabilities and strengthening of institutions, then the rating agency could decide to revise its outlook back to "stable".

In December 2016 Fitch Ratings had already revised its credit rating outlook for Indonesia from "stable" to "positive" due to Indonesia's low government debt burden and favorable economic growth outlook, while structural reforms (referring to the government's economic policy packages that have been launched since September 2015 as well as the tax amnesty program) are gradually improving the nation's business and investment climate, while Indonesia's sovereign's exposure to banking sector risks were regarded "limited".

Read more: Fitch Ratings Revises Indonesia's Rating Outlook to "Positive"

While Fitch Ratings and Moody's Investors Service had already upgraded Indonesia to investor grade status several years ago, Standard & Poor's (S&P) still rates Indonesia's debt below investment grade. This is a problem for Indonesia because several big institutional investors require investment grade ratings from all three key credit ratings agencies before being allowed to buy into a nation's debt.

Credit Rating Indonesia:

     Standard & Poor's        Fitch Ratings            Moody's
Rating Outlook Rating Outlook Rating Outlook
Indonesia BB+ Positive BBB- Positive Baa3 Positive