Moody’s places Indonesia’s Sovereign Credit Rating on Review for Possible Upgrade


Global Credit Research – 01 Dec 2010

Singapore,  – Moody’s Investors Service has  placed on review for upgrade the Indonesian government’s Ba2 foreign and local-currency bond ratings.

The main reasons for the decision are:

(1)      Indonesia’s economic resilience is accompanied by sustained macroeconomic balance;

(2)     The government’s debt position and the central bank’s foreign currency reserve adequacy are improving; and

(3)     the economic policy framework remains increasingly well positioned to deal with evolving macroeconomic challenges and potential shocks.

The rating review also applies to Indonesia’s Ba1 country ceiling for foreign currency (FC) bonds and Ba3 ceiling for FC bank deposits. 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 currency obligations of other entities domiciled in the country.

RATIONALE FOR THE REVIEW FOR POSSIBLE UPGRADE:

Moody’s had placed Indonesia’s Ba2 sovereign ratings on positive outlook in June 2010, after a one-notch upgrade in September 2009, on account of the country’s resilience to the global financial crisis, improving government credit-metrics, and its ability to manage domestic political challenges to the reform agenda without damaging key policy institutions’ credibility or effectiveness.

“We have now placed the sovereign credit ratings and country ceilings on ‘Review for Possible Upgrade’ as the economic recovery is being sustained alongside well managed external accounts and reasonably good inflation fundamentals,” said Mr. Aninda Mitra, a Vice-President at Moody’s and its lead sovereign analyst for Indonesia.

“Moreover, the recent improvement in Bank Indonesia’s foreign currency reserve position coupled with continuing reduction in the government’s debt burden are reducing risk perceptions and encouraging greater inflows of foreign direct investment and long-term capital,” he added.

“Additionally, amidst growing inflows of foreign portfolio investment, monetary stability alongside ongoing policy flexibility are enabling Indonesian authorities’ to gradually deepen money markets and heighten financial absorption capabilities,” says Mr. Mitra.

RISKS TO THE RATING AND ECONOMIC OUTLOOK

Moody’s considers key risks to the rating outlook to be embedded in the country’s political system.

Opposition from coalition partners have slowed the government’s drive to institute economic reforms, however, this has not yet impacted overall policy management capabilities or near-term economic prospects.

Indonesia’s banking sector prudential ratios are well positioned. However, if bank supervision is constrained by political interference or poor governance, the risk of a shock to the real economy or to the government’s contingent liabilities could rise.

CREDIT TRIGGERS FOR A POSSIBLE UPGRADE:

These would include assessments during the review of whether:

(1)      market deepening prospects and the ongoing development of the domestic institutional investor base will continue to lend more stability to the government’s onshore debt “finance-ability”;

(2)     ongoing monetary management will continue to anchor medium-term inflation expectations as well as investor confidence amidst lingering global financial market uncertainty –derived from, but not limited to, quantitative easing in the U.S. and Japan, banking and sovereign debt problems in the Eurozone; and

(3)     the durability of the greatly strengthened balance of payments and external payments position.

PREVIOUS RATING ACTION & METHODOLOGY

Moody’s last rating action on Indonesia was on June 21, 2010 at which time the outlook on the Ba2 sovereign rating was shifted to positive, from stable.

The principal methodology used in rating the government of the Republic of Indonesia is “Moody’s Sovereign Bond Methodology”, published in September 2008, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody’s website.

http://www.bi.go.id/web/en/Publikasi/Investor+Relation+Unit/Highlight+News/Sovereign+Rating.htm

Singapore

Aninda S. Mitra

Vice President – Senior Analyst

Sovereign Risk Group

Moody’s Investors Service Singapore Pte. Ltd.

JOURNALISTS: (852) 3758 -1350

SUBSCRIBERS: (65) 6398-8308

Singapore

Thomas J. Byrne

Senior Vice President – Regional Credit Officer

Sovereign Risk Group

Moody’s Investors Service Singapore Pte. Ltd.

JOURNALISTS: (852) 3758 -1350

SUBSCRIBERS: (65) 6398-8308

Moody’s Investors Service Singapore Pte. Ltd.

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Singapore Land Tower

Singapore 48623

Singapore

© 2010 Moody’s Investors Service, Inc. and/or its licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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