Moody's Upgrades Indonesia's Sovereign Ratings To Ba1

Moody's had placed Indonesia's Ba2 sovereign ratings on review for possible upgrade in December 2010.

This was due to the country's resilience to the global financial crisis, improving government and external credit-metrics, and an ability to manage domestic political challenges to the reform agenda without damaging key policy institutions' effectiveness.

“We have upgraded the sovereign credit ratings as the momentum in the economy is expected to be sustained by steady domestic demand, a reasonable pace and sequencing of policy and structural reforms, and rising foreign direct investment.

Furthermore, the country's debt position and reserve adequacy remain on an improving trajectory relative to most of its ratings peers,“ says Mr. Aninda Mitra, a Vice-President at Moody's and its lead sovereign analyst for Indonesia.

Rationale for stable outlook

“The stable outlook balances prospects for further improvements in sovereign credit metrics against uncertainties emanating from ongoing shifts in the banking supervisory framework. Moreover, economic policy management has thus far been effective, but is facing a growing challenge from the twin threats of inflation and speculative capital inflows,“ says Mr. Mitra.

“The stable outlook also reflects the gradual pace of the deepening in the country's capital markets and the recent proposal for the creation of a “bond-fund“ both of which, in the 12-18 month timeframe, could slowly begin to enhance the government's onshore debt finance-ability,“ he added.

Risks to the rating and economic outlook

Moody's considers key risks to the rating outlook to be mainly embedded in the country's political system. Opposition from coalition partners has slowed the government's drive to implement far-reaching economic reforms; however, this has not thus far impacted overall policy management capabilities or near-term economic prospects.

Nonetheless, if, against our expectations, adversarial or obstructionist politics were to impede policy making and administration or banking supervision, investor confidence could suffer and financial market pressure could rise.