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Singapore — Moody’s Investors Service says that Indonesia’s (Baa3 positive) credit profile is supported by narrow fiscal deficits, low government debt, a large economy and healthy GDP growth prospects.

But credit challenges include low revenue mobilization and a reliance on external funding, factors which expose the economy and government finances to fluctuations in global financing conditions.

The positive outlook on the sovereign’s rating reflects Moody’s view that
external vulnerabilities are easing, and that policy effectiveness is improving.

Moody’s report says that the outlook for growth in Indonesia remains stable, with real GDP likely to hover around 5.2%-5.3% year-on-year, supported by steady private consumption and a pick-up in export growth.

In recent years, the gradual streamlining of the country’s complex regulatory environment for investment has translated in improvements in investor perceptions and a pick-up in fixed capital formation, although investment growth is still below peaks.

Moody’s also points out that the government’s strong adherence to limiting fiscal deficits has kept the debt burden at modest levels. However, a narrow revenue base constrains debt affordability.

Commodity prices that are higher than troughs and the continued stability in growth and investment inflows have resulted in a build-up in external buffers. However, Indonesia’s reliance on foreign currency funding exposes it to shifts in global financing conditions, although external buffers are stronger than in 2008 or around the time of the so-called taper tantrum in 2013.

Moody’s would consider upgrading the Baa3 sovereign rating, if Indonesia
showed further progress in sustainably reducing external vulnerabilities, while at the same time demonstrating enhanced institutional strength. One
positive indication of this development would be a reduction in the government’s reliance on external debt.

While a downgrade of the rating is unlikely — given the positive outlook — the country’s credit profile could weaken if evidence built up that the nascent institutional strengthening is on hold or reversing; we perceived that the government is unable to improve revenue performance; we changed our expectations of the growth outlook to predict a material and durable weakening in economic performance relative to peers; and/or a domestic or
external shock increased the likelihood that fiscal, debt, or balance of payments metrics would weaken significantly from current levels.