Moody's: Indonesia's growth to stabilize, but external vulnerabilities remain

Moody's Investors Service says that growth for Indonesia will stabilize near current levels as the economy has adapted to lower commodity prices and policy has turned more accommodative.

Moody's notes that the government has made progress in facilitating infrastructure development, and declining inflation has allowed for monetary easing.

Moreover, foreign currency reserves have been rebuilt over the past two years as cooling domestic demand and subsidy reforms narrowed the current account deficit.

Moody's conclusions were contained in its credit analysis on Indonesia, and which examines the sovereign in four categories: economic strength, which is assessed as "high (+)"; institutional strength "low (+)"; fiscal strength "high (-)"; and susceptibility to event risk "moderate (-)". These are the four main analytical factors in Moody's Sovereign Bond Rating Methodology.

The report constitutes an annual update to investors and is not a rating action. It also follows Moody's decision on 28 January to affirm Indonesia's Baa3 government bond rating, driven by our expectation that the government will maintain its strong balance sheet despite widening fiscal deficits.

As part of that decision, Moody's anticipates that policymakers will respond to lower commodity prices and weaker growth to ensure the sustainability of Indonesia's external payments position.

While Moody's notes that slower growth has been consistent with similarly rated commodity exporters, Indonesia remains susceptible to external headwinds, including a further dip in commodity prices and volatility in global capital flows. Weaker oil price has eroded fiscal revenues, worsening debt affordability, while the government's reliance on nonresidents to meet its borrowing needs is high.

At the same time, the administration has turned to reform to spur investment and support the balance of payments, but the country has a mixed track record of implementation.

Indonesia's overall external indebtedness is also low, at around 35% of GDP in 2015, but the depreciation of the rupiah is pressuring private-sector debt, and cross-border claims on Indonesia have jumped by nearly 10 percentage points of GDP since reaching a low of 25.2% in 2011.