Moody's Keeps Indonesia on Investment Grade Path
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Indonesia moved a step closer towards securing a coveted top sovereign debt grading on Monday when Moody's upgraded its foreign and local-currency bond ratings to Ba1 from Ba2.
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A good rating is crucial for emerging market economies as it allows governments to borrow more cheaply and makes the country more attractive to risk-averse investors.
Indonesia has been a darling of foreign investors for the last two years and has ridden out the global financial crisis with flying colors. The stock market [.JKSE Unavailable ()] rose by more than 40 percent in 2010 and foreigners have also poured into the debt market, attracted by a base interest rate of 6.5 percent.
Inflation worries, however, prompted a sell-off this month that pushed up bond yields and knocked stocks and the rupiah currency [IDR=X 9019.0 
"Indonesia's economic resilience is accompanied by sustained macroeconomic balance," Moody's said in a statement on the rating upgrade.
"The government's debt position and the central bank's foreign currency reserve adequacy are improving; and the prospects for foreign direct investment inflows are also improving. This is expected to fortify Indonesia's external position and economic outlook."
Not everyone is as bullish on Indonesia, however.
Morgan Stanley [MS 29.66
Hot Money
Rahmat Waluyanto, chief of the finance ministry's debt office, said the rating upgrade was "very special".
But policy makers remain concerned that hot money that has poured into Indonesia in search of high yields could flow out just as rapidly, and have introduced a series of measures to shift money towards longer-term investments.
And while the central bank's base rate has remained at a record low 6.5 percent for over 18 months, inflation has been creeping up — particularly food prices — and many analysts believe policy makers are now behind the curve on the rate.
Moody's said the local currency bond and deposit ceilings have been raised to Baa1 from Baa2, but added the country ceiling for short-term FC debt is "Not Prime" and remains unaffected by this action.
Morgan Stanley, however, recommended reducing curve exposure and to underweight Indonesian bonds.
"With inflation rising, even modest further liquidation pressures could lead to outsized increases in Indonesian treasury yields," the bank said.
Indonesian Foreign Minister Marty Natalegawa said the rating upgrade was a dividend for the hard work the country had put into fixing the economy.
"Contrast where we are now compared to 10 years ago," he said. "We are now part of the engine of economic growth, if not for the world, for the region."
