Moody's Assigns Definitive Ba1 Rating for Indonesia's Global Bond

Indonesia Finance

Tuesday, 17 January 2012 15:29

Written by Hans GN

Theindonesiatoday.com - Moody's Investors Service has assigned a rating of Ba1 to the Government of Indonesia's U.S. dollar-denominated bond issuance maturing in 2042. The outlook is stable.

Moody's definitive rating for this debt obligation confirms the provisional rating assigned on January 9, 2012. Moody's rating rationale was set out in a press release published on the same day.

Indonesia's sovereign rating has been supported by increasingly robust domestic demand over the past few years, which has helped to shield the economy from the global financial crisis. In the ensuing recovery, the pickup in global commodity prices further bolstered the economic outlook.

In contrast to many of its ratings and regional peers, Indonesia has been able to maintain its economic momentum despite a deterioration in external demand in the second half of 2011. Real GDP growth has averaged 6.5% year-on-year through the first three quarters of 2011, while inflation has trended downwards.

This rapid pace of growth looks to be sustainable over the medium-term, aided by an improving track record of inflation management by the monetary authorities and enhanced prospects for infrastructure development.

In addition, government finances continue to be managed conservatively with deficits averaging below 2% of GDP since 2001. However, further improvement has been encumbered by the lack of progress on subsidy reform, while structural issues impede the effectiveness of government expenditure.

Nonetheless, the government's debt burden as a share of GDP has fallen even through the global recession and is likely to remain on a gradually improving trend, providing ample fiscal space to stimulate growth if necessary.

Indonesia's foreign currency reserve adequacy has also benefited since the crisis from strength in non-oil and gas commodities exports and larger FDI and portfolio inflows, some of which may be reversible. As a result, the stock of foreign currency reserves have more than doubled from $51.6 billion at end-2008 to $110.1 billion at end- 2011, more than two times residual short-term external debt.

Challenges to the rating include the relatively shallow depth of Indonesia's capital markets, manifested in fairly large non-resident ownership of government securities. As this poses a key vulnerability in the event of substantial capital outflows, the government has put together a crisis management protocol to stabilize the bond market and mitigate any adverse effects on deficit financing. (Theindonesiatoday.com)

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