The credit quality of Indonesia's sovereign, corporates, and financial institutions is expected to remain broadly stable during the early part of the new government's tenure, despite a still-difficult external environment.
Generally healthy credit fundamentals, coupled with expectations of gradual macroeconomic rebalancing and reduced political uncertainty, will bolster the stable outlook for issuers in Indonesia, says Moody's Investors Service, despite the demanding external environment.
"Indonesia's moderate external deficits and commodity-reliant exports remain key risks, given the likelihood of further US monetary policy normalization and sustained economic weakness in China in the coming quarters," says Rahul Ghosh, a Moody's Vice President and Senior Research Analyst.
"But Indonesia's resilience to negative pressures is strengthening as shown by the narrowing trade deficit and falling consumer price inflation," added Ghosh.
Credit conditions should remain broadly supportive in the coming quarters, as the incoming government, led by President-elect Joko Widodo begins its new term, says Moody's.
Overall sovereign credit quality has resisted external pressures, and internal political uncertainties have moderated following parliamentary and presidential elections earlier this year and the upcoming inauguration of the new administration.
In addition, the new Indonesian government's intentions to reduce fuel subsidies and unblock infrastructure bottlenecks will be credit positive for both the sovereign and key sectors such as infrastructure and oil and gas, if implemented.
But still-existent export restrictions on commodity producers will continue to drag on Indonesian miners' credit profiles, says the rating agency.
Still, Moody's observes that structural reforms that require majority support will take time to materialize, given the fragmented nature of parliament.
Finally, Moody's notes that portfolio inflows could also suffer if market optimism over Indonesia's reform agenda is dashed; a scenario which could trigger currency volatility and weigh on credit spreads.