JAKARTA (Bloomberg): Indonesia’s Finance Minister Purbaya Yudhi Sadewa pushed back after Moody’s Ratings lowered the outlook on the nation’s credit rating to negative and triggered further selling of local stocks, bonds and the rupiah.
Indonesia’s Baa2 rating outlook was cut on Thursday from stable on concerns of policy uncertainty and weakening governance under President Prabowo Subianto’s administration.
Moody’s warned of a downgrade if there is a sustained increase in the budget deficit, prolonged currency depreciation or capital flows, or a material weakening of state-owned firms.
Such a downgrade would be the first by Moody’s since 1998 in the depths of the Asian financial crisis, when the country needed a bailout from the International Monetary Fund.
"There are not strong enough reasons for a downgrade,” Purbaya told reporters in Jakarta on Friday. "In fact, we should gradually see the prospect of an upgrade,” especially if economic growth accelerates to more than 6% this year, from 5.11% in 2025.
But the Moody’s warning highlights the challenges facing the Prabowo administration as it tries to restore market confidence.
The benchmark stock index suffered its worst two-day rout since 1998 last week after index compiler MSCI Inc. warned that the emerging market could be downgraded to frontier status because of a lack of liquidity and transparency in the stock market.
Indonesian stocks slid as much as 3% on Friday, while the 10-year bond yield rose 11 basis points to the highest in more than four months. The rupiah fell 0.2%, nearing the key psychological level of 17,000 per dollar.
"The Moody’s outlook downgrade is a warning shot, which could trigger other ratings agencies to follow suit, particularly if the nature of policymaking remains subject to a heightened degree of uncertainty,” Oversea-Chinese Banking Corp. economist Lavanya Venkateswaran said in a note.
The outlook change was the latest in a flurry of bad news over the last two weeks that has rattled policymakers and investors in Southeast Asia’s largest economy. It also quickly overshadowed news that Indonesia’s economic growth beat forecasts in the fourth quarter.
"Given the rapid way in which things appear to be deteriorating we’re probably not especially far from that downgrade coming down the track,” said Michael Brown, strategist at Pepperstone Group. "It’s definitely another reminder of the litany of downside risks facing Indonesian assets, and crystallizes concerns that were lingering already.”
Purbaya reiterated his pledge to keep Indonesia’s budget deficit manageable through efficient spending on Prabowo’s priority programs.
In a separate statement on Thursday, Bank Indonesia Governor Perry Warjiyo said that the outlook downgrade "does not reflect any weakening in Indonesia’s economic fundamentals.” Both the central bank and the finance ministry are committed to maintaining stability in prices, the rupiah, and the financial system.
According to Moody’s, Indonesian policy has become more unpredictable and less cohesive, while communication has been less effective. Just days prior, the finance chief had given a lengthy interview before investors in which he dismissed concerns about the country’s direction and ridiculed one critic’s academic qualifications.
"If sustained, the trend could erode Indonesia’s long-established policy credibility, which has supported solid economic growth and macroeconomic, fiscal, and financial stability,” Moody’s said.
Fellow debt watcher S&P Global Ratings said that further fiscal deterioration would put downward pressure on Indonesia’s sovereign rating. The risks include net general government debt increasing by more than 3% of GDP annually and interest payments consistently surpassing 15% of revenues, said analyst Rain Yin in an emailed response to queries on Friday.
S&P affirmed Indonesia’s rating at BBB with a stable outlook in July and has not yet issued its latest credit rating assessment.
Analysts expect the lower rating outlook could hurt the rupiah and spur foreign outflows from sovereign debt.
"This is pretty bad news,” said Lionel Priyadi, a macro strategist at PT Mega Capital in Jakarta. "Rupiah is at risk of hitting 17,000 per dollar.”
Abrdn Investments, however, said it isn’t overly concerned by Moody’s outlook cut, noting Indonesia would remain investment grade even if downgraded.
While expansionary fiscal policy bears watching, deficits and debt levels remain low by emerging-market standards, said the firm’s head of EM sovereign debt, Edwin Gutierrez.
The outlook downgrade is another blow to Prabowo, whose reign has been tumultuous, unsettling businesses and markets. His administration has seized mines and plantations, arrested professionals who worked for the government on corruption charges, restructured the nation’s powerful state-owned enterprises and rolled out costly social welfare programs.
The president also sacked his respected former finance minister and cracked down on the country’s tycoons.
"Sentiment will likely remain volatile in the near-term,” said OCBC’s Venkateswaran. Investors will be watching responses from the authorities closely and "credible policy choices are needed to avert a full credit downgrade in the next 12 to 18 months,” she said.
--With assistance from Faris Mokhtar, Marcus Wong and Ruth Carson.
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