Indonesia's (Baa2 stable) key growth drivers are under significant strain this year, said Moody's Investors Service recently.
While growth should rebound next year, a halt to reforms in state-owned enterprises, the corporate sector, infrastructure and human capital development, as well a prolonged weakness in commodity prices present downside risks to a sustained growth recovery, according to the credit rating agency, adding that the extent of fiscal erosion is intrinsically tied to the growth recovery.
"Under our base case, Indonesia's fiscal deficit and debt burden will both rise but remain in line with the Baa-median, because of its stronger starting points and the fact that its budgetary deterioration has been less than that of its rating peers," said Anushka Shah, a Moody's Vice President and Senior Analyst.
However, a slower recovery presents risks to these assumptions and would strain the government's debt affordability, which was already weak pre-coronavirus, Shah noted.
That said, the country's decade-long predictable and disciplined policies have resulted in a low budget deficit and debt burden, affording it with some fiscal space, Moody’s noted.
"As Indonesia dips into its monetary and fiscal buffers, how it uses accumulated institutional credibility and manages a reversion to pre-coronavirus buffer levels will determine the credit implications," Shah said.