JAKARTA (TheInsiderStories) – Indonesian government planned to release dual-currency bonds in US Dollar and Euro based on Moody’s Investors Service latest report released today (10/23). The notes to be issued under the government’ existing US$10 billion shelf program.
This is Indonesia’ fourth dual-currency bonds following 2017 and 2018 and second time in this year. Last June, the country has issued US$750 million in RI0929 series and EUR750 million in RIEUR0926 series, as a part of state budget financing.
Maturity for the US Dollar bond is 10 years, while the Euro bond is 7 years. Coupon for the Euro bond is 1.45 percent while the US Dollar bond is 3.4 percent. The yield is set as 1.487 percent and 3.45 percent, respectively. The bond has Baa2 from Moody’s, BBB from Standard & Poor’s, and BBB from Fitch.
For the new issuance, the agency has assigned Baa2 ratings to the proposed senior unsecured US Dollar and Euro-denominated notes to be issued by the government. The planned issuances have maturities ranging from 5 – 30 years.
The notes will rank pari passu with all of the government’ current and future senior unsecured external debt. The proceeds of the notes are intended for general budgetary purposes, including for financing requirements. The rating mirrors the Government of Indonesia’ long-term issuer rating of Baa2 with a stable outlook.
Indonesia’ 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. It incorporates downside risks from political challenges to further implementation of broad economic, fiscal and regulatory reforms. Because they seek to address entrenched constraints and go through various institutional hurdles, we expect effective reforms to proceed relatively slowly, with potential delays to occur.
The stable outlook also takes into account upside risks from a potential improvement in competitiveness as a result of effective reform implementation. Furthermore, Moody’s rated, environmental risks are a material credit consideration for Indonesia.
Coastal flooding and rising sea levels are a particular concern, with widespread implications, including for agricultural production and food security.
Earlier this year, the government announced its plan to relocate the country’ capital city to Kalimantan from Jakarta, in part because the existing capital is particularly vulnerable to rising sea levels and its associated effects. Separately, demand for arable land and intensive commercial logging have led to soil erosion and deforestation.
In addition, given its location on the ‘Ring of Fire’, Indonesia is subject to considerable seismic activity that are manifested in natural disasters such as earthquakes, tsunamis and volcanos.
Social considerations exert limited influence on Indonesia’ credit profile. Demographics act as a credit support, given a size-able and growing working age population.
However, Indonesia’ education quality and spending fall behind global standards, and therefore, the government plans to increase fiscal spending to improve the quality of human capital.
Moreover, wealth is concentrated and Indonesia’s rankings on wealth inequality indices are weak. Governance considerations relevant to Indonesia’ credit profile are captured in our assessment of institutional strength.
Although Indonesia lags peers in terms of Worldwide Governance Indicators with rule of law representing particular challenges, percentile rankings point to steady improvement.
The stable outlook 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 result from further progress towards achieving stronger growth potential, commensurate with the country’s population growth and income levels, including through a deepening of financial markets and improved competitiveness.
A reduction in external vulnerabilities and improvements in institutional strength would also add upward pressures. This assessment would be supported by a reduction in the government’ reliance on external debt, or tangible evidence that reforms foster investment, competitiveness or sustained increases in revenues.
Downward pressure would arise if evidence indicates that the strengthening of Indonesia’ policy framework and institutions stalls or reverses. Then, Moody’s concluded that the prospects of medium-term broadening of the revenue base are limited, indicating limitations to policy effectiveness and posing continued constraints to economic growth
And SOEs‘ financial strength materially worsened pointing to a rising likelihood for material contingent liabilities to crystallize on the government’ balance sheet.
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