Singapore — Moody’s Investors Service (“Moody’s”) has assigned a definitive Baa3 rating to the senior unsecured US dollar-denominated bonds issued by the Government of Indonesia (Baa3 positive).
The senior unsecured bond will rank pari passu with all of the government
of Indonesia’s current and future senior unsecured external debt. The proceeds of the bonds are intended for the Republic’s financing requirements.
The definitive Baa3 rating is based on the prospectus dated 4th December
Indonesia’s Baa3 issuer rating incorporates the country’s relatively low
government debt levels, narrow fiscal deficits, and healthy growth as compared to similarly rated emerging market peers. Indonesia also benefits from the large scale of the economy and a stable banking system that poses limited contingent risks to the sovereign.
The narrow revenue base is a key credit constraint that hampers the
government’s ability to support economic growth given its commitment to
the statutory deficit ceiling of 3.0% of GDP. Other credit challenges include a shallow domestic capital market, which results in a reliance on external funding.
The positive outlook on Indonesia’s issuer rating reflects a reduction in
its level of external vulnerability as well as ongoing policy reforms.
Indonesia’s external position has strengthened despite low commodity
prices and bouts of volatility in capital flows over the past two years. The current account deficit narrowed to 1.8% of GDP in 2016, and 1.5% of GDP during the first nine months of 2017, from over 3% as recently as 2014.
Along with net inflows of foreign direct and portfolio investments, a narrower current account deficit contributes to a build-up of gross international reserves to $126.0 billion as of end-November 2017, providing a large buffer against volatility in capital flows.
These developments are partly the result of a shift in monetary policy towards preserving macroeconomic stability and away from a focus on
short-term growth. Fuel subsidy reform implemented in 2015 has already
contributed to moderate external vulnerability. Moreover, the government
has demonstrated fiscal discipline against the backdrop of continued pressure from lower oil and gas prices in recent years.
More generally, the government has pursued structural economic, fiscal and regulatory reforms, although these reforms have not yet provided a large boost to private sector investment.
An upgrade would result from further progress in reducing external
vulnerabilities and improving institutional strength. This assessment
would be supported by a reduction in the government’s reliance on
external debt, or tangible evidence that reforms foster investment,
competitiveness or sustained increases in revenues.
A downgrade is unlikely given the positive outlook. We could revise the
outlook to stable if the nascent institutional strengthening is on hold
or reversing, there is a lack of improvement in revenue performance, the
growth outlook weakens relative to peers, and fiscal, debt, or balance of
payments metrics weaken significantly.