Photo credit: Moody's

JAKARTA (TheInsiderStories)–Moody’s Investors Service has today assigned a provisional foreign currency senior unsecured programme rating of (P) Baa2 to the new samurai shelf programme by the Government of Indonesia.

The shelf programme was filed under the Japanese shelf registration process on May 15th, and the overall amount of the new securities that can be issued under the shelf is JPY600 billion.

The rating mirrors the Government of Indonesia’s long-term issuer rating of Baa2 with stable outlook. Concurrently, Moody’s also assigned a Baa2 rating to drawdowns under the
programme, with maturities of 3, 5, 7 and 10 years.

RATINGS RATIONALE

According to the terms and conditions available to Moody’s at the time of the rating committee, the notes to be issued under the new shelf programme will constitute direct, unconditional and unsecured obligations of the Government of Indonesia (the issuer), and will rank pari passu among themselves and at least pari passu in right of payment with all
other present and future unsecured obligations of the government.

The proceeds of the notes to be issued under the programme are intended to finance the budget deficit or for general financing purposes.

Indonesia’s Baa2 rating is underpinned by policy emphasis on macroeconomic stability that increases its resilience to shocks. The sovereign’s credit profile is supported by narrow fiscal deficits and low government debt ratios. The large size of its economy and healthy and stable growth prospects act as credit supports. Credit challenges include low revenue mobilization, and a reliance on external funding.

The stable outlook reflects balanced risks at Baa2. The stable outlook incorporates downside risks from political challenges to the implementation of further broad economic, fiscal and regulatory reforms. While we expect effective reforms to proceed relatively slowly, further delays or reversals compared with our expectations could happen, especially – although not only – ahead of next year’s elections, when reforms involve increasing competition with a negative impact on incumbents.

The stable outlook also takes into account upside risks from a potential improvement in competitiveness as a result of effective announced and planned reforms.

The present administration has passed various policy packages targeted primarily at improving the environment for investment. The effectiveness of these policies in improving the attractiveness of Indonesia as a place to invest has yet to become clear. Policy-makers’ perseverance in this direction is key to ensuring that GDP growth moves towards the country’s potential levels.

WHAT COULD MOVE THE RATING UP/DOWN

The stable outlook on Indonesia’s issuer rating indicates that rating changes are unlikely in the foreseeable future.

Over time, indications that fiscal policy measures can durably and significantly raise government revenue would put upward pressure on the rating. Higher revenue would enhance fiscal flexibility and provide more direct financial means for the government to address large social and physical infrastructure spending needs. An upgrade would also potentially result from materially stronger growth potential, commensurate with the country’s population growth and income levels, including through a deepening of financial markets and improved competitiveness.

Downward pressure would arise if: 1) evidence built up that the strengthening of Indonesia’s policy framework and institutions is on hold or reversing; 2) Moody’s concluded that the prospects of some broadening of the revenue base over the medium term are very limited, indicating limitations to policy effectiveness and posing continued constraints to economic growth; and/or 3) SOEs’ financial strength materially worsened pointing to a rising likelihood of crystallization of material contingent liabilities on the government’s balance sheet.

GDP per capita (PPP basis, US$): 11,719 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 5% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 3% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -2.5% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -1.8% (2016 Actual) (also known as External
Balance)

External debt/GDP: 34.3% (2016 Actual)

Level of economic development: High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded
since 1983.

On 22 May 2018, a rating committee was called to discuss assigning a provisional rating to the new samurai shelf programme of the Government of Indonesia. The committee also discussed assigning definitive ratings to four drawdowns. The main points raised during the discussion were: The terms and conditions of the notes to be issued under the new shelf programme and the conclusion that these notes would rank pari passu with other senior unsecured debt obligations of the Government of Indonesia.

Email: fauzulmuna@theinsiderstories.com

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