UPDATE 1-Moody's raises outlook on Indonesia sovereign rating

JAKARTA/HONG KONG, June 11 - Moody's changed its outlook on Indonesia's sovereign rating to "positive" from "stable" on Thursday, saying the country had strong growth prospects given its reliance on domestic demand and "effective" economic policies.

The outlook change for Indonesia's "Ba3" ratings marks a rare upgrade of views for the region from a credit agency, and comes ahead of the country's presidential elections in July.

Fitch Ratings already is rating Indonesia one notch above Moody's current rating, at "BB" with a "stable" outlook. Standard & Poor's has the country at "BB", equivalent to Moody's current "Ba3" rating, but with a "stable" outlook.

"The improvement in the outlook was prompted by Indonesia's relatively strong growth prospects, and an increasingly effective macroeconomic policy framework," said Aninda Mitra, a Moody's Investors Service analyst for Indonesia, in the statement.

The International Monetary Fund had raised its 2009 economic growth forecast for Indonesia to 3-4 percent from 2.5 percent previously due to better-than-expected first-quarter growth.

Indonesia's economy may grow below 4 percent in the second quarter of the 2009 from a year ago, although domestic consumption should support growth, Finance Minister Sri Mulyani Indrawati said on Monday.

Southeast Asia's economy has also benefited from having a lower exposure to exports than many of its neighbours, helping it weather the impact of the global crisis better.

Moody's also raised the outlook on the country's B1 foreign currency bank deposit ceilings to positive from stable, but left the outlook on its Ba2 foreign currency country ceiling at stable

Indonesian financial markets were steady after the change in ratings outlook. The Jakarta composite stock index <.JKSE> was down 0.3 percent, while the rupiah, the best-performing currency in Asia this year, was off 0.5 percent at 10,070 per dollar on corporate demand for the U.S. currency.

Wiling Bolung, an analyst at ANZ Bank in Jakarta, said the outlook change would not significantly alter bond market sentiment.

"But it will help when government plans to issue dollar denominated bonds," he said.

Jakarta policymakers have been trying to boost domestic economic activity to counter weaker global demand for its key exports of commodities, including launching a 73.3 trillion rupiah ($7.29 billion) fiscal stimulus package earlier this year.

The central bank has cut its key interest rates <BIPG> by a total of 2.5 percentage points since December to 7.0 percent, and has said it may cut further in response to easing inflation and a firm rupiah.

Moody's did not see a risk of a sudden change in economic policies before or after the presidential election on July 8.

It noted President Susilo Bambang Yudhoyono was widely expected to win, but said that even if one of the other two candidates won it was "not mutually exclusive of an effective and pro-reform policy stance."

Yudhoyono faces a challenge from Vice President Jusuf Kalla and former president Megawati Sukarnoputri.

The report noted that government and external debt were expected to decline to 31 percent and 25 percent of GDP, respectively, by the end of 2009.

It also said that adequate liquidity, ample capital, and better overnight lending rates meant there was little risk of a banking crisis, while the corporate sector also faced refinancing pressures from a "position of relative credit strength."