April 13, 2018 / 3:24 AM / in a year

Moody's upgrades Indonesia's sovereign rating in boost to Widodo's economic agenda

JAKARTA (Reuters) - Moody’s Investors Services on Friday upgraded Indonesia’s sovereign credit ratings a notch above its lowest investment grade, citing effective policies to support broad economic stability, in a boost to President Joko Widodo’s drive to rev-up growth.

Indonesian President Joko Widodo gestures during an interview with Reuters at the Presidential Palace in Jakarta, Indonesia, February 10, 2016. REUTERS/Darren Whiteside/Files

Moody’s said it now rates debts of Southeast Asia’s largest economy at Baa2, up from the previous Baa3 with a stable outlook.

The move followed Fitch Ratings’ upgrade in January to also one notch above the lowest investment grade. Indonesia’s debts are now rated the same by the two rating agencies, while S&P still rates Indonesia at the bottom of its investment grade scale.

Bank Indonesia (BI) said this is the highest ever rating Moody’s has given the country.

The Moody’s decision bolsters President Widodo’s ambitious multi-billion dollar effort to spruce up Indonesia creaking infrastructure - part of a broader goal to foster faster economic growth.

The nation could count on foreign investors to provide some of the financing, given a ratings upgrade could mean more capital inflows for a country as its default risk is considered lower.

Local securities firm Trimegah Securities said the upgrade “should improve sentiment on bonds, which may spill over to equity”, while Mirae Asset Sekuritas advised its clients to buy large-cap stocks as the move could be positive for the share market.

The Jakarta benchmark stock index rose as much as 0.4 percent in early Friday trading, while the rupiah strengthened slightly to trade at 13,755 per dollar. Yield of benchmark 10-year government bond fell to 6.567 percent from 6.583 percent in the previous close.

Moody’s attributed the upgrade to Indonesia’s growing resilience and capacity to respond to shocks and complimented policies that it said were credible and effective.

The ratings agency said Indonesia has maintained strict adherence to its fiscal deficit legal limit and that government debt has been low. It forecast the government’s debt to hover around 30 percent of GDP in the next few years, below the median of 39 percent for all investment grade sovereigns.

It also praised the central bank for getting inflation inside its target range for three years in a row and for adopting a flexible approach to currency intervention, while noting that the country’s foreign exchange reserves were adequate.

The reserves were at record high of $132 billion at the end of January, but has since declined partly due to BI’s intervention to stabilise the rupiah currency.

In response to Moody’s move, BI Governor Agus Martowardojo said in a statement the central bank will remain vigilant to global risks and optimise monetary policy to safeguard stability.

However, Moody’s said its stable outlook “incorporates downside risks from political challenges to the implementation of further broad economic, fiscal and regulatory reforms”.

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It said delays or reversals in reforms could happen, especially ahead of next year’s elections.

Critics said there have been signs of populist policies creeping back with the announcement of price control measures, including for rice, fuel and electricity.

On Thursday, Finance Minister Sri Mulyani Indrawati told foreign correspondents that the government is committed to reforms.

Additional reporting by Fransiska Nangoy in JAKARTA and Sangameswaran S in BENGALURU; Editing by Shri Navaratnam

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