Moody's Investors Service has assigned Baa2 ratings to the proposed senior unsecured US Dollar notes to be issued by the Government of Indonesia (Baa2 stable) - Photo by the Ministry Office

JAKARTA (TheInsiderStories) – Moody’s Investors Service has assigned Baa2 ratings to the proposed senior unsecured US Dollar notes to be issued by the Government of Indonesia (Baa2 stable). The planned issuance have maturities ranging from 10 – 50 years.

According to the terms and conditions available to the agency, the notes to be issued under the existing US$10 billion shelf program filed with the United States’ Securities and Exchange Commission will constitute direct, unconditional and un-subordinated obligations of the the issuer.

The notes will rank pari passu with all of the Government of Indonesia’ current and future senior unsecured external debt. The proceeds of the notes are intended for general budgetary purposes, including to partially fund its COVID-19 relief and recovery efforts. The rating mirrors the Government of Indonesia’s 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.

Reported coronavirus cases in Indonesia have risen rapidly over the past month, triggering closures and lockdowns across the archipelago and dealing a severe blow to the tourism industry, which will sharply dent the country’s growth. Despite recently announced monetary and fiscal stimulus, the effects on the financial markets have been severe. While Indonesia’s current account and budget deficits are low, prolonged risk aversion will weigh on already weak debt affordability and test external buffers.

Sizeable non-resident investment in Indonesia exposes the country to swings in capital inflows, which are amplified during episodes of global financial market stress. This has economy-wide effects, particularly for the fiscal and external accounts, but also for local businesses. Weaker corporate credit profiles due to higher debt servicing and roll-over costs hurt bank asset quality.

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. It also reflects balanced risks and takes into consideration a relatively slow pace of reform momentum.

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 likely result from indications that Indonesia’ growth potential is strengthening, towards rates commensurate with the country’s population growth and income levels, including through a deepening of financial markets and improved competitiveness.

Downward pressure would likely arise if a prolonged, entrenched slowdown in growth has economy-wide impacts and fiscal repurcussions, including difficulties reverting to a declining fiscal deficit trajectory following one-time stimulus packages. Then, evidence indicates that the gradual strengthening of Indonesia’s policy framework and institutions stalls or reverses.

And, a meaningful deterioration in the external position were to occur, such as from prolonged currency depreciation or capital outflows, with ramifications for debt affordability.

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