Moody's Investors Service, a global bond credit rating agency, assigned a definitive rating of Baa3 (stable outlook) to Indonesian government notes maturing in 2025 and 2045 (these notes are issued under the government’s global medium-term note program). Moody’s said in a press release on Tuesday (13/01) that the Baa3 government bond rating is supported by the country’s narrow fiscal deficits, low public indebtedness, healthy economic growth prospects, and the large size of Indonesia’s economy.
However, Moody’s also detects a number of weaknesses in the Indonesian economy and which bring along credit challenges:
• Institutional weaknesses reflected in Indonesia's scores on the World Bank's governance indicators
• The relatively shallow domestic capital market led to a reliance on foreign funding, thus being susceptible to international financial volatility
• Non-resident holdings comprise a relatively large proportion of government securities, thus being more vulnerable to global shocks
• Indonesian private sector debt (foreign denominated) increased sharply over the past few years
• A significant portion of public debt stock is foreign currency-denominated and thus exchange rate volatility may impair fiscal strength
• Growth and the balance of payments may be susceptible to terms of trade shocks originating from a decline in global commodity prices as well as the impact of international financial volatility
Moody’s stated that, compared to similarly rated peers, the Indonesian government's budget deficits have generally been contained at low levels and this has been key in steadily reducing the government's debt burden as a share of GDP over the past decade. In combination with a favorable maturity profile it has led to relatively small gross financing requirements for the Indonesian government.
The global rating agency is also positive about the elimination of the country’s gasoline subsidies and the introduction of a cap on diesel subsidies. This move improves fiscal flexibility and reduces price distortions (throughout the economy) caused by ‘unnaturally’ low fuel prices (artificially low fuel prices also bring great inflationary shocks in times of administered price adjustments). Moody’s emphasized that it is a good sign that the Joko Widodo-led administration showed its willingness and ability to undertake structural reforms to improve the economic and social fundamentals of Southeast Asia’s largest economy.
Lastly, Moody’s believes that Indonesia will stand tall in times of external volatility (as the country has shown in recent years) as Bank Indonesia’s foreign exchange reserves have been growing (USD $111.9 billion at the end of December 2014) and the government's bond stabilization framework acts as a buffer against external financial volatility in 2015.