Moody's Investors Service Assigned Baa2 Backed Senior Unsecured Debt Ratings to the Indonesia' planned US dollar-denominated SUKUKS Baa2 stable UnderExisting US$25 Billion Issuance Program.

JAKARTA (TheInsidersStories) – Moody’s Investors Service has assigned Baa2 backed senior unsecured debt ratings to the planned US dollar-denominated SUKUKS (trust certificates) to be issued by the Government of Indonesia (Baa2 stable) through Perusahaan Penerbit SBSN Indonesia (PPSI) III, under its existing $25 billion trust certificate issuance program.

The ratings apply to all the proposed tranche issuances, including a Green SUKUK tranche. The notes will rank pari passu with all of the Government of Indonesia’s current and future senior unsecured external debt.

The proceeds of the notes are intended to finance or re-finance expenditure directly, including financing of eligible green projects for the Green SUKUK tranche. In Moody’s opinion, the payment obligations represented by the securities to be issued by PPSI III are ranked pari passu with other senior, unsecured debt issuances of the Government of Indonesia.

The rating mirrors the Government of Indonesia’s long-term issuer rating of Baa2 with a stable outlook. Moody’s notes that its sukuk ratings do not express an opinion on the structures’ compliance with Shari’ah law.

RATINGS RATIONALE

Indonesia’s Baa2 issuer 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.

“We expect effective reforms to proceed relatively slowly, with potential delays or reversals to occur, especially – although not only – ahead of presidential elections in April 2019, when reforms involve increasing competition with a negative impact on incumbents,” says Moody’s in the latest report.

The stable outlook also takes into account upside risks from a potential improvement in competitiveness as a result of effective reform implementation.

The present administration has passed various policy packages targeted primarily at improving the investment environment. The effectiveness of these policies in improving the attractiveness of Indonesia as an investment destination remains to be seen. Policy-makers’ perseverance in this direction is key to ensuring that GDP growth moves towards the country’s potential levels.

WHAT WOULD MOVE THE RATING UP/DOWN

The stable outlook on the Government of Indonesia 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 to the issuer rating 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.

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.

On the other hand, downward pressure would arise if:

1) evidence indicates that the strengthening of Indonesia’s policy framework and  institutions stalls or reverses;

2) 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;

3) the financial strength of state-owned enterprises (SOEs) materially worsened pointing to a rising likelihood for material
contingent liabilities to crystallize on the government’s balance sheet.

This credit rating and any associated review or outlook has been assigned on an anticipated/subsequent basis.

by Linda Silaen, Email: linda.silaen@theinsiderstories.com

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