Indonesian markets resume selloff after Moody's cuts outlook

• The rupiah remains near its record low of 16,985 per U.S. dollar, down nearly 1% year-to-date, while the Jakarta Composite Index has fallen 2.7% this week after declining 6.9% last week
• Moody's maintained Indonesia's Baa2 rating but warned that persistent governance issues could erode the country's policy credibility, with other ratings agencies potentially following suit within 12-18 months
• Foreign investors have sold approximately $860 million in Indonesian assets, and despite government assurances about solid economic fundamentals, markets continue experiencing outflows amid concerns about fiscal deficits and central bank independence

Indonesian Markets Resume Selloff After Moody's Cuts Outlook

Key Development:

Moody's downgraded Indonesia's credit rating outlook to negative from stable on Thursday, citing reduced policy predictability and weakening governance concerns. This follows MSCI's transparency warnings that triggered over $80 billion in market losses, compounding pressure on Southeast Asia's largest economy.

Market Impact:

• Jakarta Composite Index fell 0.5% Thursday, down 2.7% for the week, following last week's 6.9% decline
• Rupiah trading near record low of 16,985 per U.S. dollar, down nearly 1% year-to-date
• Indonesian international bonds slipped, with longer-dated dollar bonds easing 0.3-0.5 cents to five-month lows
• Foreign investors sold approximately $860 million in Indonesian assets
• Long-term government bonds, state-owned enterprises, and major bank stocks face particular pressure

Government Response:

Chief Economic Minister Airlangga Hartarto downplayed the downgrade, claiming ratings agencies don't understand Indonesia's new growth strategy. Financial regulators emphasized that Moody's maintained its Baa2 rating, citing solid economic fundamentals and strong growth.

Outlook:

Analysts warn the downgrade signals potential actions from other ratings agencies if policy uncertainty persists under President Prabowo Subianto. Concerns include widening fiscal deficits and central bank independence issues. OCBC economists noted authorities' responses will be closely monitored, as credible policy choices are necessary to avoid further downgrades within 12-18 months.

Risk Assessment:

Markets face higher risk premiums across all asset classes, with continued capital outflows expected despite government assurances and leadership changes at financial regulators and the stock exchange.