Muhamad Al Azhari, Ardian Wibisono & Dion Bisara – Credit rating agency Moody's Investors Service has upgraded Indonesia's sovereign credit rating outlook to positive from stable, citing the country's strong economic potential and effective fiscal policy.

"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 vice president and sovereign analyst for Indonesia.

The country's "strong domestic demand and a balanced economy with an investment momentum that was less susceptible to external trade or financial shocks" has given it a relatively good growth outlook, she said

"A pick-up in economic activity to its recent [growth] rate of 5.5 percent is expected in 2010," Mitra said, adding that "Indonesia's overall growth dynamic is steadier and better positioned than many Ba-rated peers, as well as most other regional economies."

Indonesia's debt-market assets are rated at speculative grade by Moody's with a Ba3 rating. Obligations rated Ba are considered to be of questionable credit quality. The country needs three more rating upgrades before reaching investment grade, and the change in outlook from stable to positive may improve the chances of this happening.

Finance Minister Sri Mulyani Indrawati welcomed the upgrade, saying "it shows our economy has lower potential risks [of default] compared with others that they have appraised – the benchmark countries that are included in our group."

Sri Mulyani added that "a positive [outlook] means there is a greater possibility of a ratings upgrade."

According to Moody's, "the time horizon for rating outlooks is generally 12 months to 18 months, although developments could prompt earlier rating action."