Moody’s: Indonesia’ Sovereign Rating Supported by Modest Debt Ratio

JAKARTA (TheInsiderStories)Indonesia’s sovereign rating is supported by the country’s modest government debt ratios, large economy and healthy growth prospects, told Moody’s Investors Service report titled: “Indonesia’s credit profile supported by modest government debt; challenged by reliance on external funding” on Wednesday (02/13).

Moody’s remarked that the currency depreciation over 2018, although less pronounced than for many other emerging market currencies, did have economy-wide repercussions.

In the face of this currency depreciation, a strong policy framework, both monetary and fiscal, coupled with proactive policy coordination supported the sovereign’s credit profile.

This suggests that two-thirds of the government debt stock is vulnerable to shifts in overseas investor appetite and exchange-rate risk. Much of this foreign-currency funding is through market sources of financing.

“Indonesia’s government debt is modest at around 30 percent of GDP, well below the Baa-median of 47.3 percent. At the same time, dependence on external financing is relatively large; a little over 40 percent of general government debt is foreign currency-denominated and 37.8 percent of local currency government securities is held by nonresident investors,” noted Moody’s.

Meanwhile, credit challenges include low revenue mobilization, which weighs on debt affordability, and a reliance on external funding. Moody’s said that Indonesia’s (Baa2 stable) credit profile is balanced by modest government debt levels and a reliance on external funding.

“Indonesia’s fiscal discipline has resulted in narrow deficits and a modest debt burden,” said Moody’s senior analyst.

Based on Moody’s analyze that real GDP has been growing at a strong and stable pace, averaging in excess of 5.0 percent year-on-year (y-o-y) over the past five years.

In 2008-2017 periods, annual growth averaged 5.6 percent y-o-y, making Indonesia among the fastest growing, and also most stable, Baa-rated countries. Through 2018, real GDP growth expanded 5.2 percent y-o-y, compared with 5.1 percent in 2017.

The growth was driven by strong domestic demand, including consumption primarily from the household and government sectors; as well as fixed capital formation.

However, Moody’s forecasts that growth will dip just below 5.0 percent in 2019-2020, due to a likely moderation in government spending and a slower pace of infrastructure development. This forecasting GDP growth rate is still stronger than the median average for Baa2-rated sovereigns.

“We expect growth will likely moderate slightly in 2019 and 2020, to 4.9 percent and 4.8 percent respectively. A weaker pace of infrastructure development coupled with slower trade flows led by global factors, will also weigh on headline growth,” said Moody’s.

While private sector, Moody’s noted, consumption should remain stable due to increased social spending and handouts, government spending could slow post presidential elections in April 2019.

A rating downgrade could arise if the strengthening of Indonesia’s policy framework and institutions stalls or reverses; or if prospects of medium-term broadening of the revenue base are limited, posing continued constraints to infrastructure development and growth.

“A worsening in the financial strength of state-owned enterprises could also pose negative rating pressures if they indicate a rising likelihood to crystallize on the government’s balance sheet,” Moody’s reported.

So far, Indonesia is also less exposed to slowing global trade when compared with other economies in Asia Pacific, although lower global commodity prices will weigh on growth.

However, the Indonesian economy is primarily domestically driven, with consumption and investment comprising about three-fifths of overall economic output. Despite its strengths in various commodity-related industries, and as a major exporter of coal, palm oil and rubber, trade openness is low compared with several other economies in the region.

As a result, Indonesia is among economies in the region that will be less impacted directly from ongoing trade tensions between the US and China. However, China is Indonesia’s largest trading partner, accounting for 17.6 percent of its total trade flows.

Reportedly, about 40 percent of Indonesia’s exports to China are mineral products and raw materials, such as coal, lignite, palm oil and petroleum products. This suggests that if final demand from China falls, Indonesia’s export growth will be compromised.

Written by Daniel Deha, Email: daniel@theinsiderstories.com