Bangkok--7 Jan--Moody's
Moody's Investors Service says, in its annual report on Indonesia, that Indonesia's Ba3 government bond rating is supported by the country's moderate economic strength -- which includes the economy's substantial size, diversity and increasing dynamism -- and low, though improving, institutional strength.
"However, the rating also reflects the country's low per-capita income, and shortcomings in the rule of law," says Mr. Aninda Mitra, a Moody's VP/Senior Analyst and the report's author.
"Amidst a deep downturn in commodity prices and in the global economy, Indonesia's overall economic resiliency is underpinned by its relatively low openness to global trade and an investment cycle that is not heavily dependent on external capital inflows," says Mitra.
"While capacity constraints and vulnerability to supply side shocks remain present, trend improvements in economic resiliency are likely to ensure a relatively shallow reduction in GDP growth to 4 -- 5% in 2009 from 6% in 2008," says Mitra.
"Such resiliency is further supported by improvements in the functioning of its federal framework, the government's anti-corruption efforts, and better tax administration," says Mitra.
The report notes that Indonesia has maintained its fiscal deficit at just 1% of GDP in the past four years, and that sound fiscal policy management could help further reduce the general government debt to below 30% of GDP in the year ahead. Prudent debt management has also reduced the country's gross funding needs.
On the other hand, Indonesia's overall financial strength -- another important driver of the sovereign rating -- is constrained by the government's dependence on external financing and the external payment
position's vulnerability to the global credit crunch and to portfolio investment deleveraging. Exchange rate risks may also, over time, heighten external financing requirements sizably, and test the government's resource mobilization capacity.
"These factors limit overall fiscal flexibility," says Mitra. "Moreover, subsidies and interest payments, which are expected at 25-30% of total government revenues in 2009, also limit fiscal space."
Indonesian authorities are currently making progress in securing a $5-6 billion standby loan arrangement with and credit enhancement facilities from multilateral sources; and tapping capital markets whenever possible.
"Along with recent improvements in tax administration, the success of such efforts could offset the downturn in commodity tax revenues and may provide room for limited counter-cyclical fiscal measures," says Mitra.
The susceptibility of the ratings to event risks is moderate, according to Mitra. Reform policies are expected to continue through the election cycle, which at this time seems likely to return to power the government headed by President Yudhoyono.
However, such policy continuity is by no means assured, cautions Mitra, adding, "Poor corporate governance and the lingering influence of powerful vested business interests from within the political system could either slow structural reforms or hurt policy implementation and credibility in the run-up to, or shortly after, the presidential elections of July 2009." At the same time, however, political risks from
other factors, ranging from conservative Islamic political activism to Jemaah Islamiyah terrorism, have been contained.
Furthermore, financial risks from the un-hedged foreign currency debt of the corporate sector or currency mismatches in the banking sector's assets and liabilities were low and the quality of supervision and enforcement of regulations had improved.
"As a result, amidst the ongoing global financial volatility, Indonesia's banking and corporate sectors are much less vulnerable to confidence shocks than during the 1997 crisis," says Mitra.
The report notes that the stable outlook on the Ba3 government bond rating is premised on the authorities' ability to manage the country's vulnerability to the global financial market crisis and recession, while avoiding a deep and sustained deterioration in relative credit metrics.
The report, entitled, 'Moody's Sovereign Credit Analysis: Indonesia', can be found at www.moodys.com.
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