Bangkok--29 Jan--Moody's Investors Service
Moody's Investors Service has assigned a foreign currency rating of Ba3 with a stable outlook to the Republic of Indonesia's forthcoming global Medium-Term Notes program.
Indonesia's Ba3 sovereign 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 lead sovereign analyst for Indonesia.
"Amidst a deep downturn in commodity prices and in the global economy, Indonesia's overall economic resiliency is shielded by its relatively moderate openness to global trade and the ability of domestic demand to drive growth," 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 analyst noted 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 30% of GDP in the year ahead. Prudent debt management has also reduced the country's gross funding needs.
On the other hand, the government's overall financial strength -- another important driver of the sovereign rating -- is constrained by its dependence on external financing. And the country's external payment position's vulnerability to the global credit crunch and to portfolio investment de-leveraging.
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 the analyst, adding, "moreover, subsidies and interest payments, which are expected at 25-30% of total government revenues in 2009, also limit fiscal space."
The analyst noted, however, that Indonesian authorities have recently secured a $5 billion standby loan arrangement with multilateral bodies; and they could seek further credit enhancement facilities. "Along with recent improvements in tax administration, the success of such efforts could offset the downturn in commodity tax revenues, improve market access, and may even provide some room for limited counter-cyclical fiscal measures," says Mitra.
The susceptibility of the ratings to event risks is moderate, according to Mitra. Despite some loosening, reform-oriented policies are expected through the upcoming election cycle, which at this time seems likely to return to power the government headed by President Yudhoyono. 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, Indonesia banking and corporate sector is facing the ongoing global financial volatility from a stronger position than at the time of the 1997 crisis," says Mitra.
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 principal methodology that Moody's uses in rating the Republic of Indonesia is its Sovereign Bond Methodology, which can be found at www.moodys.com in the Credit Policy & Methodologies directory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory on Moody's web site.
Singapore
Aninda S. Mitra
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Singapore Pte Ltd.
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Singapore
Thomas J. Byrne
Senior Vice President - Regional Credit Officer Sovereign Risk Group Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308