Moody's Investors Service has flagged increasing risks in Indonesia due to ongoing policy uncertainty and concerns over fiscal sustainability. The agency's cautious outlook reflects a shift towards more negative risks since it downgraded Indonesia's outlook to negative in February, according to Martin Petch, a vice-president in the sovereign risk division.
Key Details
Petch noted that recent pressures, particularly following the Iran war, have led to significant increases in subsidies, impacting the fiscal outcomes for this year and the next. Investor concerns have intensified regarding President Prabowo Subianto's economic agenda, particularly issues related to fiscal discipline and the government's expanding role in key sectors. This has contributed to a selloff in Indonesian assets, making the country's bonds, currency, and stocks among the poorest performers in the region.
A specific area of concern is the establishment of PT Danantara Sumberdaya Indonesia, a new agency created in May to oversee raw-material exports. Moody's highlighted that a lack of clarity surrounding the agency's mandate has exacerbated investor anxiety regarding rising state intervention. The agency also pointed out Indonesia's narrow revenue base as a growing constraint, limiting the government's ability to finance ambitious programs, such as a free lunch initiative.
Background
Despite these challenges, there have been some positive developments. Indonesia has reduced its lunch program budget in response to rising energy subsidy costs, aiming to keep the deficit within legal limits. Officials are also reviewing the budget for potential savings. However, S&P Global Ratings recently affirmed Indonesia's investment-grade rating and stable outlook, contrasting Moody's and Fitch Ratings' more cautious assessments.
The warning from Moody's could lead to increased volatility in Indonesian assets, including bonds and equities, as investors reassess their exposure amid heightened concerns over fiscal policies and government intervention. The outlook may particularly affect the Indonesian rupiah and government bonds, which are already under pressure. Investors will watch for further developments in fiscal policy and any changes in the government's economic strategies.