Moody's gives thumbs up to RI economy

Urip Hudiono, The Jakarta Post, Jakarta

The chances of a rating upgrade are looking good for Indonesia, with Moody's Investor Service citing ongoing improvements in the macroeconomic situation and fiscal position, all of which are impacting favorably on the country's creditworthiness.

The global rating agency affirmed Thursday its "positive outlook" on Indonesia's B1 local and foreign currency bond ratings, reflecting greater political and economic stability, a more diversified economy supporting stable growth and a prudent fiscal policy.

It also reflects the country's improving sovereign debt and balance of payments positions.

Highlighting in particular the country's fiscal and balance of payments positions, Moody's Asia regional credit officer Tom Byrne said Indonesia could "within the next year be in a strong position to be in the `Ba' area."

The country's current "B1" sovereign rating is still four rungs below Moody's "Baa3" investment-grade rating, with the lower "Ba" ratings having to be gone through first before reaching that level.

Moody's upgraded Indonesia's rating from B2 in May last year, and in February of this year upgraded its outlook to "positive" from "stable".

"Indonesia's 6 percent inflation is still higher than the region, but it's an improving trend, while the exchange rate is also more stable. Its external payments position has improved as exports has been seeing double-digit growth, building up forex reserves to US$50 billion," Byrne said.

"If this momentum can be sustained until the runoff in the 2009 elections and even after that, then it will bode well for Indonesia's sovereign rating."

Byrne noted that Indonesia's fiscal deficit would likely exceed the government's original target of 1.1 percent of gross domestic product (GDP), and could even hit 1.8 percent, due to higher tax refunds, and spending on infrastructure and disaster mitigation.

The overall trend of a falling government debt-to-GDP ratio would however remain on track, declining to 38 percent this year from last year's 42 percent.

"We believe the government can manage the fiscal deficit, with revenue performance improving from 15 percent to 21 percent, so that the government can consider spending more to jump-start public infrastructure development projects," he said.

Low levels of investment, as well as continued weakness in some areas of governance, were also noted by Moody's as representing other challenges to Indonesia's economy and growth rate.

"There is, however, the new Investment Law, which is expected to especially attract foreign investment."

Indonesia's private sector debt was also looking good, with Moody's regional corporate finance director Brian Cahill noting that there was no broad country-specific issues in evidence that could negatively affect the current stable outlook of 28 out of a total of 37.

Similarly, Moody's financial institutions credit officer, Deborah Schuler, saw the banking industry's prospects as being positive on the back of lower interest rates, higher earnings and improving bad loans.

Higher credit ratings enable governments and corporations to obtain cheaper loans with lower risk premiums from the global debt markets.

The government sold $1.5 billion worth of dollar-denominated global bonds in February. Other global credit rating agencies have given Indonesia similar below-investment-grade ratings, with Standard & Poor's giving the country a "BB-/Stable/B" rating, and Fitchs a "BB-" with a "positive outlook".