Moody's: Despite Some Risks Outlook for Indonesia's Economy Still Stable
Moody's Investors Service, one of the big credit rating agencies, stated in its 'Credit Analysis: Indonesia' report that - despite the ongoing current account deficit (which is considered to be structural) and a relatively shallow and volatile domestic capital market (which contributes to Indonesia’s reliance on external funding) - the agency is positive about Indonesia's outlook due to its growth prospects, narrow fiscal deficits and low public debt. Indonesian government bonds are rated at Baa3, which is Moody's lowest investment-grade status.
The credit rating agency detects susceptibility to external financial shocks due to low commodity prices, triggered by the ongoing downshift of China’s economic growth, that result in a widening current account deficit and a decreasing trend in foreign exchange reserves. The relatively weak outlook for global commodity prices may also affect the financing of the current account shortfall. Indonesia's susceptibility to external shocks was also seen when the Federal Reserve started speculating about an ending to its quantitative easing program, subsequently resulting in large capital outflow from the country.
Moody's is positive about Indonesia's banking sector, with total assets equivalent to 52 percent of GDP at end-2012. The nation's banking sector "poses a very low contingent risk to the government’s balances sheet, as it is characterized by high profitability and strong capitalization. However, while asset quality is moderate, we [Moody's] expect a slight deterioration as the economy slows and interest rates rise." In recent months, the country's benchmark interest rate (BI rate) has been raised gradually from 5.75 percent to 7.25 in order to combat higher inflation (8.40 percent in September 2013, yoy).
After strong growth of domestic credit in recent years, Indonesia's central bank (Bank Indonesia) has taken pre-emptive measures since early 2012 to curb loan growth and to improve prudential lending practices, in particular for consumer loans, which accounted for 23 percent of system loans at end-2012. These include "the imposition of a cap on the number of credit cards for each individual, tighter loan-to-value requirements for mortgages, and minimum downpayments for motor vehicle loans."
Moody's believes that political risks are low for Indonesia. The institutions sees political stability during the two terms of president Susilo Bambang Yudhoyono. However, next year new elections will be held (and Yudhoyono is not allowed to participate as the Indonesian constitution stipulates a two-term limit to the presidency) and this could increase risks. Ahead of the 2014 general elections, some policy risks have already been detected, "reflected in the number of protectionist measures passed over the last year. While many of these measures have been rolled back in light of the need to stabilize Indonesia’s external accounts, the lack of policy predictability is a concern, in the context of sustaining the confidence of international investors."