Last Tuesday, Indonesia’s (Baa2 stable) government bond spiked by nearly 30 basis points to 7.3%, but retreated to 7.2% at the end of the week, while the currency, the rupiah, extended its decline for the third consecutive month in May, depreciating 4.1% since the start of this year.
Anushka Shah, Vice President – Senior Analyst, Sovereign Risk Group, Moody’s Investors Service judging these market developments will have a credit-negative effect on the government’s fiscal metrics and weigh on debt affordability.
Currency depreciation raises the risk of higher imported inflation, and because the currency declines reflect outflows of portfolio capital, they may signal underlying balance-of-payment challenges through a drop in foreign-reserve buffers.
The market challenges reflect a stronger U.S dollar, higher oil prices and lackluster domestic economic growth. Although some of these factors are structural credit weaknesses specific to Indonesia, others affect many emerging markets.