Indonesia too reliant on foreign funds: Moody’s

RI too reliant on foreign funds: Moody’s

Satria Sambijantoro, The Jakarta Post, Nusa Dua, Bali | Business | Mon, October 07 2013, 12:06 PM

Indonesia’s excessive reliance on foreign funds has prevented the country from earning the “positive” rating outlook that its neighbor the Philippines recently received, according to Moody’s Investors Service. The international rating agency said that the APEC members that had enjoyed robust growth over the last few years were facing new challenges due to weak exports stemming from the subdued recovery in Europe and the US, as well as the resurgence of volatility in global financial market due to the anticipated tapering of the Federal Reserve’s quantitative easing policy.Indonesia had been particularly vulnerable because its dependency on foreign funds had become a “key weakness” for its sovereign credit profile, said Moody’s vice president and senior analyst Christian de Guzman.
“We will be looking at the health of balance of payments over the rating horizon,” he told a limited press briefing in Nusa Dua, Bali, over the weekend. “External financing is a critical point.”
The downward trend of foreign direct investment, coupled with the recent bout of hot money outflows, caused deteriorated external imbalances in Indonesia. The economy posted a deficit of US$2.5 billion in its balance of payments in the second quarter, compared to a surplus of $800 million in the same period last year.
Last week, Moody’s upgraded the Philippines’ sovereign debt papers to investment grade status of Baa3 and surprisingly labeled its credit profile outlook as “positive”. Indonesia shared the same rating, but only has a “stable” outlook, meaning that the Philippines has better economic prospects and a better chance at receiving a further rating upgrade.
The Indonesian economy only expanded 5.8 percent in the second quarter — the first time in more than two years that economic growth fell below 6 percent.
Moody’s argued that one of the reasons why Indonesia feels the brunt of capital outflow is the underdevelopment of its bonds market, which currently accounts for only 14 percent of its gross domestic product (GDP), compared to 40-50 percent of other emerging markets.
Moody’s managing director of credit policy Michael Taylor explained that a well developed domestic capital market would protect against external shocks, as it would allow investors to move funds between different assets classes in the same economy.
“If you have a well-developed bonds market, then investors’ funds tend to cycle between equities and debt, rather than moving out of the country,” Taylor stated.
Despite all the economic challenges faced by Indonesia, however, some observers remain positive with the country’s long-term prospects.
In a survey released at the APEC summit last week, PricewaterhouseCoopers ranked Indonesia first among the list of “dark horse” economies that business leaders believe had bigger potential than its current performance.
The survey, which polled 478 company executives working in APEC member economies, said that Indonesia had huge long-term potential as it had a skilled labor force, growing resource-based economic activity and consolidation of democracy.
“It did not surprise me at all,” PricewaterhouseCoopers chairman Dennis M. Nally told The Jakarta Post, referring to the survey’s results.
“I still look at Indonesia and say, ‘you’ve got tremendous untapped potential’. But it is dependant on the government’s ability to implement reform and manage challenges.”