Moody's, S&P monitoring Indonesian central bank's credibility in new debt scheme

JAKARTA: The ratings agencies Moody's and S&P said on Tuesday Indonesia's debt monetization would not affect the country's credit ratings in the short term, but they are monitoring how the central bank maintains its credibility in the implementation.

The Indonesian government on Monday introduced a nearly $40 billion fiscal deficit financing scheme that includes the central bank buying $28 billion worth of bonds without receiving interest, to fund a ballooning deficit due to COVID-19 response spending.

The scheme will reduce costs for government debt, Moody's sovereign analyst, Anushka Shah, said, but the agency is monitoring the long-term implications for the central bank's ability to maintain credibility and ensure price stability.

Moody's full analysis of the ratings implication depend on aspects that Shah said remained unclear. Those include Bank Indonesia's exit strategy, the implications the scheme has for money supply and prices and whether there are other constraints for the use of the financing by the fiscal side.

"More broadly speaking, the strength of the monetary policy framework is a sort of consideration for us," she said.

BI Governor Perry Warjiyo told an investor call on Tuesday the scheme would have a small inflationary impact and would not affect the central bank's monetary policy framework. He said BI has an exit strategy, but its current focus is on supporting the economy.

S&P noted that the debt monetization was announced as a "one-off scheme" and sees the bonds bought by BI "in the same way as those purchased by commercial creditors", its sovereign analyst Andrew Wood said.

"Like many counterparts elsewhere around the world, we've seen Indonesia's central bank and finance ministry employ unusual policy tools to mitigate the very disruptive impact of the COVID-19 pandemic on their economies and financial systems," Wood said in an email.

"How these policies affect the credibility of these institutions will likely depend on a number of factors, including whether bond-buying schemes like this one persist, even as economic and financial conditions normalize," he said.

Fitch Ratings declined to comment on Tuesday, but referred to an April note that laid out debt-monetization risks, including increased political interference in monetary policy and the erosion of the market's ability to price Indonesian debt.

The three agencies rate Indonesia one notch above the lowest investment grade. S&P revised Indonesia's outlook to negative in April. Fitch and Moody's gave the country a stable outlook.