Moody’s cuts Indonesia outlook to negative on governance concerns

Moody’s said on Thursday it had cut Indonesia’s credit rating outlook to negative from stable, citing reduced predictability in policymaking days after MSCI flagged transparency issues that triggered a market rout of more than $80 billion.

The change in outlook is a fresh hit to Indonesia, a $1.4 trillion G20 economy under the stewardship of President Prabowo Subianto, with investors cooling on the country due to problems with ownership and trading transparency.

Moody’s maintained its Baa2 rating but said the shift to a negative outlook from stable reflected risks to policy effectiveness and signs of weakening governance.

Risk of eroding policy credibility

“If sustained, the trend could erode Indonesia’s long-established policy credibility, which has supported solid economic growth and macroeconomic, fiscal and financial stability,” the ratings agency said.

Indonesia’s finance ministry said it “appreciates” Moody’s sustained rating, and that the government was undertaking “economic transformation” to revitalize growth.

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“The government continues to ensure that all potential risks are properly managed,” the ministry said in a statement released shortly after the Moody’s outlook change.

Indonesia’s central bank and the president’s office did not immediately respond to requests for comment.

A slew of Indonesian officials resigned on Friday after MSCI warned two days earlier that concerns over ownership and trading transparency in Indonesian stocks could prompt a downgrade to “frontier” status if the issues were not resolved by May.

Governance reforms promised

Indonesia has since promised capital market governance reforms and several measures to address MSCI’s concerns.

A negative outlook means the agency’s next move could potentially be a downgrade in ratings.

Moody’s said it would downgrade if there is a sustained shift to a more expansionary fiscal policy without accompanying revenue reform, a significant deterioration in external position due to capital outflows, or a material weakening in state companies’ health.

Indonesia is currently rated Baa2, the agency’s second-lowest rating for investment grade.