Bangkok--11 Feb--Moody's
Moody's Investors Service has publishedits 2011 sovereign report on Indonesia, which provides a methodologicalassessment of the country's Ba1 foreign- and local-currency issuer ratingand stable outlook.
Rationale for the Rating:
1. Indonesia's prospects for steady economic growth and price stabilityare reasonably sound, although in the near term supply-side pricepressures and capital inflow challenges will remain elevated. Meanwhile,policy and administrative reforms are improving investment prospects and
attracting greater foreign direct investment.
2. Appropriate policy management has ably steered the economy through theglobal economic crisis, but increasingly competitive local politics andshortcomings in governance weigh on institutional reforms.
3. Improved foreign currency reserve adequacy provides a stronger bufferagainst external shocks. In addition, the ongoing reduction in thesovereign debt burden is driving improvements in the government's debtaffordability. However, in comparison to investment-grade rated peers,
Indonesia remains more dependent on non-resident -- and less stable --sources of financing.
4. The limited size of domestic institutional investors' assets and thelack of depth in the domestic capital markets elevates to some degreesovereign credit vulnerability to large shifts in portfolio capital
flows, but the creation of a bond stabilization framework may start toalleviate such risks.
Rationale for the Outlook:
"The rating outlook is stable and balances prospects for furtherimprovements in sovereign credit metrics against several uncertaintiesincluding ongoing shifts in the banking supervisory framework and thetwin threat of food-price-driven inflation and speculative capitalinflows," said Mr. Aninda Mitra, a Moody's Vice President and SeniorAnalyst.
Mr. Mitra was speaking on the release of the annual sovereign report onIndonesia on February 10, 2011.He added that "the stable outlook also incorporates the gradual pace ofdeepening in the country's capital markets and the recent proposal forthe creation of a bond stabilization framework. Over the near to mediumterm these developments could enhance the government's onshore debt
finance-ability. And, if accompanied by financial and price stability androbust FDI inflows, they may provide an uplift to the sovereign ratingtoward an investment-grade level."
What Could Change the Rating -- Up:
Greater assurance of continued monetary and price stability andsoundness of bank supervision
A gradual deepening of the local capital and credit markets that
Support the government's onshore debt finance-ability
Further evidence of sustained increases in foreign direct investmentwhich would be supportive of the external balance of payments andeconomic growth prospects
What Could Change the Rating -- Down:
Sustained loss of inflation control and monetary stability
A large shock to the country's fiscal, debt, or foreign currencyreserve positions -- derived, for instance, from policy mismanagement ora domestic political shock that results in deep deterioration of residentand investor confidence.
Previous rating action & methodology:
Moody's last rating action on Indonesia was on January 17, 2011, at which time the sovereign rating was upgraded to Ba1 with a stable outlook, fromBa2 on review for upgrade.
The principal methodology used in this rating was Moody's Sovereign Bond
Methodology published in September 2008.
The report can be accessed at www.moodys.com.