Moody's Investors Service has affirmed Indonesia Eximbank long-term local and foreign currency issuer ratings of Baa2 - Photo by the Company

JAKARTA (TheInsiderStories) – Moody’s Investors Service has affirmed Indonesia Eximbank long-term local and foreign currency issuer ratings of Baa2. The agency also affirmed lender’ Baa2 long-term senior unsecured and P-2 short-term foreign currency medium-term note program ratings, as well as the long-term foreign currency senior unsecured debt ratings of Baa2.

At the same time, the rater has downgraded Indonesia Eximbank’ Baseline Credit Assessment (BCA) to b3 from b2. The outlook is stable.

The affirmation of the bank’ long-term issuer ratings of Baa2 reflects Moody’s assessment that the bank will receive extraordinary support from the Government of Indonesia (Baa2 stable) in times of need. Moody’s assumes a very high level of government support because of the bank’ quasi-sovereign status, reflected by the bank’ establishment under the Act of the Republic of Indonesia No. 2 2009.

The Act specifies, the government’ sole ownership and full control over the bank, the bank’ policy role as the country’ export credit agency, and the capital support from the government, if the bank’s capital falls below a specified threshold. The downgrade of BCA is driven by the deterioration in asset quality.

The nonperforming loan ratio rose sharply to 23.4 percent as of Dec. 31, 2019, from 13.7 percent a year ago, driven by an increase in bad loans from large exposures in the mining, palm oil and textile segments. Moody’s expects the bank’ asset quality to remain weak over the next 12 – 18 months, due to the slowdown in global trade and potential slippages from a high stock of special mention loans.

Profitability will also be under negative pressure because of the need to make additional provisions. The bank reported a net loss of Rp4.7 trillion (US$335.71 million) for 2019, largely a result of high provisioning costs.

Nevertheless, Indonesia Eximbank’ capital has remained stable, with the loss in 2019 partially offset by a Rp2.5 trillion capital infusion from the government during that same year. The Tier 1 capital ratio stood at 16.8 percent at the end of 2019, unchanged compared to a year ago.

The government will inject another Rp5 trillion this year, although part of it will be offset by a one-time increase in loan-loss provisions, because of the adoption of the local equivalent of International Financial Reporting Standard 9 on Jan. 1, 2020.

The lender’ liquidity improved marginally in 2019, helped by debt refinancing, a shrinking loan book and the capital infusion. While the bank remains susceptible to external market conditions as a result of its reliance on wholesale funding, refinancing risks are somewhat mitigated by its quasi-sovereign status.

Indonesia Eximbank’ BCA of b3 is constrained by underlying weaknesses in risk governance, as observed in the high levels of bad loans. The bank also faces a higher environmental risk than commercial banks, arising from a greater exposure to the coal, palm oil and paper industries, which are increasingly at risk of asset stranding because of social, policy and technological developments that favor less carbon-intensive alternatives.

An upgrade of the sovereign rating could lead to an upgrade of Indonesia Eximbank’ long-term ratings, assuming the sovereign’ willingness to provide support remains strong. Moody’s could also its BCA if the bank’ asset quality improves.

A downgrade of the sovereign rating would lead to a downgrade of Indonesia Eximbank’ long-term ratings. A decline in the willingness of the sovereign to provide support could also exert downward pressure on the bank’ long-term ratings. In addition, Moody’s could downgrade the agency’ BCA if the asset quality deteriorates further or capital weakens without indication of further capital infusion from the government.

Indonesia Eximbank) is headquartered in Jakarta, and reported total assets of Rp108.7 trillion at Dec. 31, 2019.

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