JAKARTA -- Credit rating agency Fitch Ratings on Thursday said it had upgraded Indonesia's sovereign bonds by one notch from BBB- to BBB with a stable outlook, providing a tailwind for the country in navigating expected monetary tightening policies in the U.S. and elsewhere.

"Indonesia's resilience to external shocks has steadily strengthened in the past few years, as macroeconomic policies have consistently been geared toward maintaining stability," Fitch said in a news release. It cited rising foreign exchange reserves and a monetary policy that has been "sufficiently disciplined to limit bouts of volatile capital outflows during challenging periods."

The agency did, however, also highlight potential challenges, including pressure on emerging markets from the expected U.S. Federal Reserve's monetary tightening policy, as well as domestic issues. "The possibility that political noise becomes a distraction from economic policy-making in the run-up to the 2018 local elections and 2019 presidential election represents a risk to the strong reform drive and could undermine domestic and foreign market sentiment," it said.

In May, S&P Global Ratings upgraded Indonesia's sovereign bonds to investment grade. The move triggered an inflow of capital to the country's bond market, and the yield on the 10-year government bond, which moves inversely to price, has fallen to around 6.5% from 7.8% at the beginning of the year.