Indonesia has sufficient capacity to cushion the impact of financial turbulence resulting from the looming rise in the Federal Reserve interest rate and the slowdown in China’s economy, according to Moody’s Investors Service.
Given the positive outlook and strong fiscal metrics, the international ratings agency has kept Indonesia’s sovereign credit Baa3.
“We see basically a stalling [in the rating] instead of an improvement that we saw prior to 2012,” said Moody’s vice president and senior analyst Christian de Guzman on Thursday.
Data from Moody’s shows that Indonesia’s sovereign credit has stalled at Baa3 since 2012. The upward trajectory of the rating between 2009, in which the country was rated Ba3, and 2012, paused due to Indonesia’s slowing growth rate and trade data, the report read.
The Central Statistics Agency (BPS) announced in early November that Indonesia’s year-on-year (yoy) GDP growth stood at 4.73 percent for the July-September period, a slight increase from the 4.67 percent posted in the second quarter and the 4.72 percent recorded in the first three months of the year.
The third quarter’s figure was below market consensus and estimates by the government and Bank Indonesia (BI), which mostly placed the growth range at 4.8 to 4.85 percent.
Moody’s predicts that Southeast Asia’s largest economy will expand by 4.7 percent this year, lower than the government’s target of 5 percent.
The growth rate, though lower than the government’s target, remains comparatively high compared to other emerging markets.
The agency attributed the country’s resilience to its large foreign exchange reserves.
However, Indonesia’s foreign exchange reserves have fallen 10 percent to US$100.7 billion this year through to October, according to Bloomberg data.
To bolster its foreign exchange reserves and to “prefund” next year’s state budget, the government on Wednesday issued US dollar denominated bonds worth $3.5 billion. Indonesia last sold dollar bonds in January worth $4 billion.
Christian said the prefund was merely the government’s effort to secure funding to prevent uncertainties in regards to the Fed’s potential rate raise in mid December.
“We see this as a prudent measure,” he said.
However, Moody’s warned that Indonesia’s reliance on external debts and portfolios could increase its vulnerability to adverse global shocks. It noted that the country’s external vulnerability index (EVI), predicted to stand near 80 percent by this end of this year, was the highest among its ASEAN peers.
Moody’s EVI takes into account short-term external debts, currently maturing long-term debts and non-resident deposits over one year as a share of foreign exchange reserves and expresses these variables as a percentage.
The agency advised that external financing should be largely met by foreign direct investment into the country.
The government currently tries to attract foreign investment into the country by offering tax incentives, reducing bureaucratic red tape and ensuring measured workers’ wages hikes.
The efforts seem to be working. The Investment Coordinating Board (BKPM) recorded Rp 400 trillion in investment as of September, a 16.7 percent increase from last year’s Rp 342 trillion and a more than a 75 percent increase from this year’s target of Rp 519.5 trillion.