Jan 17, 2011

Moody's upgrades Indo ratings to Ba1

Moody's Investors upgraded Indonesian government's foreign and local-currency bond ratings to Ba1, from Ba2. The main reasons for the decision are Indonesia's economic resilience is accompanied by sustained macroeconomic balance,  the government's debt position and the central bank's foreign currency reserve adequacy are improving, the prospects for foreign direct investment inflows are also improving, and this is expected to fortify Indonesia's external position and economic outlook.
In addition, the upgrade affects the country's ceiling for foreign currency (FC) bonds, which has consequently been moved up by a notch to Baa3, and the FC bank deposit ceiling, which has been moved up to Ba2. The outlook is stable.
Moreover, the local currency bond and deposit ceilings have been raised to Baa1 from Baa2. The country ceiling for short-term FC debt is 'not prime' and remains unaffected by this action.
These ceilings act as a cap on ratings that can be assigned to the foreign and local currency obligations of other entities domiciled in the country.
Moody's had placed Indonesia's Ba2 sovereign ratings on review for possible upgrade in December 2010.  This was due to the country's resilience to the global financial crisis, improving government and external credit-metrics, and an ability to manage domestic political challenges to the reform agenda without damaging key policy institutions' effectiveness.
"We have upgraded the sovereign credit ratings as the momentum in the economy is expected to be sustained by steady domestic demand, a reasonable pace and sequencing of policy and structural reforms, and rising foreign direct investment. Furthermore, the country's debt position and reserve adequacy remain on an improving trajectory relative to most of its ratings peers," said Aninda Mitra, a Vice-President at Moody's and its lead sovereign analyst for Indonesia, in a press statement today.
"The stable outlook balances prospects for further improvements in sovereign credit metrics against uncertainties emanating from ongoing shifts in the banking supervisory framework. Moreover, economic policy management has thus far been effective, but is facing a growing challenge from the twin threats of inflation and speculative capital inflows," said Mitra.
"The stable outlook also reflects the gradual pace of the deepening in the country's capital markets and the recent proposal for the creation of a 'bond-fund' both of which, in the 12-18 month timeframe, could slowly begin to enhance the government's onshore debt finance-ability," he added.
Moody's considers key risks to the rating outlook to be mainly embedded in the country's political system.
Opposition from coalition partners has slowed the government's drive to implement far-reaching economic reforms; however, this has not thus far impacted overall policy management capabilities or near-term economic prospects.
Nonetheless, if, against our expectations, adversarial or obstructionist politics were to impede policy making and administration or banking supervision, investor confidence could suffer and financial market pressure could rise. Furthermore, the share of non-resident holdings of Rupiah-denominated Indonesian government debt has risen and a disorderly unwinding could be problematic amidst Indonesia's relatively shallow domestic capital market. 

Disclosure: No position at the stock mentioned above.  

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