Moody's Investors Service says that while Indonesia's Baa3 government bond rating is supported by relatively healthy growth prospects, structurally narrow fiscal deficits, and low public indebtedness, the country's external payments position have come under pressure over the past year and underscores the vulnerability from its reliance on cross-border funding.
The widening of the current account and the trend decrease in foreign exchange reserves over the past year—although recent data releases have shown improvement—exacerbate the country's susceptibility to external financial shocks, such as the prospective normalization of the US Federal Reserve's quantitative easing program.
Nonetheless, the government's low debt burden, favorable maturity profile, and high debt affordability — as represented by interest payments as a proportion of total revenues — guard against refinancing risks. Moreover, low gross borrowing requirements mitigate the impact of higher interest rates and exchange rate depreciation on Indonesia's debt ratios.
On the fiscal side, Moody's report says low revenue mobilization and large subsidy spending in the budget constrain Indonesia's sovereign rating. Moreover, while effective fiscal management has kept fiscal deficits in check, this achievement is counterbalanced by slowing reform momentum, which is a credit weakness.
Moody's points out that while a greater deterioration in Indonesia's reserve adequacy would be credit negative, Moody's expects the policy response to sufficiently contain such pressures.