DBS Group Research report, authored by Radhika Rao, reports that Moody’s has changed Indonesia’s rating outlook to ‘negative’ from ‘stable’ while affirming the Baa2 rating. The agency cited concerns about reduced predictability in policymaking and increased spending without corresponding revenue generation. The report emphasizes the potential for a downgrade if policy actions do not improve over the next 12-18 months.

Moody’s negative rating outlook

"Moody’s Ratings changed Indonesia’s rating outlook to ‘negative; from ‘stable’ on late Thursday, while affirming the Baa2 rating. The agency expressed far ranging concerns, citing “reduced predictability in policymaking, which risks undermining policy effectiveness and points to weakening governance.”"

"A negative outlook change typically reflects a cautious view on the sovereign, opening the window for follow-up action over the next 12-18 months. Contingent on the course of policy action in this timeframe, the next move might be an eventual downgrade in the rating or a return to the stable outlook."

"In the near-term, onshore financial markets are likely to witness kneejerk weakness due to the outlook change, with much onus on the domestic policy response thereafter. An outlook change doesn’t carry immediate changes in rating-sensitive investment mandates, although there might be lower appetite to build additional exposure, besides a higher preference for shorter-tenor papers."

"We note that the rating agency’s action is policy-driven not cyclical, thus providing the room to take corrective action. A stronger commitment to the -3% of GDP fiscal deficit cap and debt level ceilings will be timely, alongside a roadmap to gradually raise revenue measures to finance welfare plans."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)