Indeed, the sovereigns rise in the rankings was cut short last year, after analysts participating in the ECR survey lowered their assessment of the countrys risk profile by 2.9 points, leading to Indonesias position in the ECR rankings falling by six places to 64.
The sovereigns increased risk perception was underpinned by increased concerns in the rupiahs stability and the deterioration in the countrys current accounts, which have in turn raised doubts about the sustainability of the countrys growth path.
ECR analysts lowered the countrys currency stability and economic growth indicators by 0.4 last year, while the countrys government finances and bank stability scores dipped by 0.2 points during the same period.
Indonesias ECR score hit rock-bottom in the aftermath of the Asian financial crisis. The sovereigns position fell by more than 20 places in the ECR rankings, leaving it in the lower echelons of ECRs tier-five category with a global rank of just 115.
Clearly, Indonesias position in the rankings today speaks of a vastly different story to the conditions felt in the economy more than 10 years ago.
And although Indonesias efforts to boost economic growth and investment after the 1998 crisis were well received by ECR economists, recent events are raising concerns about theviability of Indonesias economic model and pose higher risks to foreign trade and investment counterparties, reckon analysts.
The rupiah depreciated considerably throughout the year from around Rp9,000 per $1 at end-2011 to Rp9,600 per $1 which meant the currency was one of the worst-performing currencies during the past year, owing to a marginal deteriorating in the countrys fiscal position and export growth.
As a result of the currencys devaluation, headline consumer price inflation rose to 5.3% in February 2013. This almost over-ran the ceiling of the central banks 3.5% to 5.5% target range and left inflation reaching a two-year high.
Meanwhile, core inflation is forecast to rise to 5% this year, from 4.3% in 2012. Analysts anticipate that rising inflation could put pressure on the Bank Indonesia to hike interest rates in 2013.
Christian de Guzman, analyst at Moodys and one of ECRs expert contributors, attributes the recent hike in inflation to the weakness of the rupiah. The central bank doesnt have the most solid record in anchoring inflation expectations amongst central banks in the region, he says. So it is important for Bank Indonesia to be more pro-active about declaring its tolerance for inflation.
Indeed, Moodys cites sustained loss of inflation control and monetary control as credit negative, and a reason that could push down the rating.
Meanwhile, the countrys current account has deteriorated moderately, shrinking to 1.8% of real GDP in 2012 from a deficit of only 0.3% of GDP in 2011.
However, Moodys claims a large shock to the countrys fiscal, debt and foreign currency reserve position would be needed to weigh negatively on the countrys credit rating with policy mismanagement posing the most likely source of a weaker fiscal position.
De Guzman recognizes that a poor policy environment remains a threat to Indonesias credit profile over the long-term. [The policy environment] is more of a concern over a longer time horizon, he says.
We see the recent rise in policy and regulatory risk as a function of the upcoming elections. There is a fair degree of positioning and politicking, with some policymakers seen as trying to burnish their nationalist credentials.
Capital Economics agree. It states: There is no guarantee that things will improve once president [Susilo Bambang] Yudhoyonos final term ends in 2014. Indeed, most of the leading presidential candidates are widely seen as throwbacks to the Suharto era. In short, there is a chance that Indonesia could take a backward step over the next few years.
ECR analysts have recognized the deteriorating policy environment, lowering the countrys regulatory and policy environment indicator by 0.3 points to 4.3 (out of 10). However, corruption remains the most substantial risk to the countrys credit profile, according to ECR analysts, with a score of only 3.2 points.
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