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Singapore, July 16, 2012 — Moody’s Investors Service says the outlook for Indonesia’s Baa3 sovereign rating remains stable.
The rating is based on four factors: moderate to high economic strength, low to moderate institutional strength, moderate government financial strength, and moderate susceptibility to event risk.
The conclusions are detailed in Moody’s annual Credit Analysis of the Government of Indonesia.
The sovereign rating reflects the country’s strong growth, low government debt, and the recent track record of prudent fiscal management.
Indonesia’s moderate to high economic strength is supported by its very large scale and favorable long-term growth prospects, although GDP per capita is relatively low compared with its rating peers. It also reflects the country’s diverse economic base, ample natural resources, as well as rising savings and investment.
Indonesia reported real GDP growth of 6.5% in 2011, the strongest since 1996. Moody’s expects full-year growth to moderate slightly to 6.0% in 2012, as robust domestic demand relative to net exports will likely result in a mild deterioration in Indonesia’s external payments position and depreciation of the rupiah.
Indonesia’s low to moderate scores for institutional strength incorporate the low but improving quality of overall governance.
In terms of government financial strength, the moderate scores reflect rapid debt consolidation and the improvement in debt structure, although structural reforms will be necessary in the long run.
Inflationary pressures should remain manageable, given the delay in the planned hikes for administered prices of fuel and electricity.
Conversely, the failure to enact subsidy reforms poses a risk to fiscal and trade balances.
Moody’s notes that despite relatively weak revenue mobilization and large subsidies, successive governments have maintained small deficits over the past decade.
In addition, although the improvement in the external payments position has paused, the stock of foreign exchange reserves, along with the government’s bond stabilization framework and existing contingent lines of financing, provides a formidable buffer against external pressures.
Indonesia’s susceptibility to event risks is moderate, given the stability of the banking system and the presence of financial buffers that can offset near-term risks.
Still, political risks remain a medium-term concern, as the policy outlook is clouded by political posturing ahead of the general elections in 2014.
The government recently announced several regulations, many of which appear to be protectionist. In the near term, however, Moody’s believes that these measures will have a limited impact on the real economy.