Moody’s Investors Service Positive about Indonesia’s Economy
Global credit rating agency Moody’s Investors Service stated that it maintains a stable outlook for Indonesia’s sovereign and corporate debt rating in the next quarters due to the country’s healthy credit fundamentals, solid macroeconomy, and reduced political tensions. Moody’s believes that Indonesia’s fundamentals are strong enough to offset the negative impact of external pressures such as looming higher US interest rates and slowing economic growth in China. Moody’s had raised Indonesia’s sovereign debt rating to investment grade in late 2011.
Moody’s senior research analyst Rahul Ghosh said that “Indonesia’s moderate external deficits and commodity-reliant exports remain key risks, given the likelihood of further US monetary policy normalization and sustained economic weakness in China in the coming quarters. But, the country’s resilience to negative pressures is strengthening as shown by the narrowing trade deficit and falling consumer price inflation.”
Although Indonesia still has to cope with a wide current account deficit (USD $9.1 billion, or 4.27 percent of the country’s gross domestic product in the second quarter of 2014), the trade deficit eased to USD $1.4 billion in the first eight months of 2014 from a deficit of USD $5.59 billion in the same period last year.
Moody’s is positive about president-elect Joko Widodo’s intention to raise prices of subsidized fuels before the year-end in an effort to relieve the government’s budget deficit and relocate funds to infrastructure development. One of Indonesia’s largest bottlenecks is the country’s lack of quality and quantity of infrastructure, which leads to high logistics costs and low competitiveness of Indonesian businesses. However, raising subsidized fuel prices will also result in accelerated inflation and may push millions of Indonesians that live just above the poverty line into poverty if the government fails to implement successful social programs. When the government raised subsidized fuel prices by an average of 33 percent in June 2013 it led to an inflation rate of about 8 percent (year-on-year). In September 2014 inflation had eased to 4.5 percent y/y, within the target range of the central bank.
Other risks that were cited by Moody’s are capital outflows that can be triggered by higher US interest rates in mid-2015 as well as the hostile Merah-Putih coalition in parliament. This coalition consists of six political parties that supported defeated presidential candidate Prabowo Subianto in the presidential election. The coalition, which forms a majority in Indonesia’s parliament, may try to oppose Widodo’s reform programs for the sake of opposition.