Indonesia Just Got Its Investment-Grade Credit Rating Back

Indonesia factory

For some time, economists had argued that Russia — which just had its ratings outlook downgraded by Fitch — be removed from the BRICs classification and be replaced by Indonesia.  Early last year we made the case for Indonesia.

Lately, some are suggesting that Indonesia replace India, which had a terrible run last year.

These arguments in favour of Indonesia aren’t without merit. Despite its inflation woes, the country has a strong labour market which could drive consumer spending.  Also, business confidence is high.  Going into 2012 Deutsche Bank economists expect the country to grow 6.3%.

Now, Moody’s has upgraded Indonesia’s sovereign rating to Baa3, from Ba1.

Indonesia’s upgrade was based on the resilience of its economy to external shocks, its policy buffers to address financial vulnerabilities, a healthier banking system and government financial metrics in line with Baa peers. From the release:

Indonesia’s cyclical resilience to large external shocks points to sustainably high trend growth over the medium term. A more favourable assessment of Indonesia’s economic strength is underpinned by gains in investment spending, improved prospects for infrastructure development following key policy reforms, and a well-managed financial system.

In addition, robust growth has been accompanied by the continued health of its external payments position, supported by increasingly large flows of foreign direct investment, while inflationary expectations are becoming better anchored at a more stable and historically lower level. 

Prudent fiscal management has contained budget deficits at very low levels and has reduced the government’s debt burden as a share of GDP.

As a result, Indonesia’s fiscal ratios now surpass many of its higher-rated peers, providing more fiscal headroom to respond to economic shocks. It has also reduced risk perceptions, enabling the government to access international funding markets even during periods of heightened risk aversion.

Policy buffers, including the central bank’s large stock of foreign exchange reserves and the government’s bond stabilisation framework, have been recently deployed and remain ample as significant lines of defence against destabilizing capital outflows. In addition, the banking sector does not pose immediate or significant contingent risks to the government’s balance sheet, thereby raising fiscal headroom and added scope to policy responsiveness to future shocks.

Issues related to governance and a fundamental assessment of institutional strength remain a concern in regard to a further improvement in Indonesia’s credit fundamentals. In addition, continued progress on targeted subsidy reform would be credit positive.

The stable outlook also reflects the expectation of continued policy flexibility and the adept management of risks stemming from global financial market volatility, based in turn on the tepid recovery in the US and the ongoing sovereign debt stress apparent in the euro zone.

Indonesia’s long-term foreign currency (FC) bond ceiling was also raised to Baa2 from Baa3, while the long-term FC deposit ceiling was aligned with the government bond rating at Baa3. In addition, the short-term FC bond and deposit ceilings were upgraded to P-3. The outlook for these ceilings is stable. These ceilings act as a cap on ratings that can be assigned to the FC obligations of other entities domiciled in the country.

The local currency bond and deposit ceilings were also upgraded to A3 from Baa1.

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