JAKARTA (TheInsiderStories) — Moody’s Investors Service has
assigned Baa2 ratings to the proposed senior unsecured dollar-denominated notes to be issued by the Government of Indonesia (Baa2 stable). 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 for general budgetary purposes. The rating mirrors the Government of Indonesia’s long-term issuer rating of Baa2 with a stable outlook.
Indonesia’s 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.
“We expect effective reforms to proceed relatively slowly, with potential delays or reversals to occur, especially – although not only – ahead of next year’s elections, when reforms involve increasing competition with a negative impact on incumbents,” said Moody’s on Monday (12/03).
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 is not yet clear. 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 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.
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) SOEs’ financial strength 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.
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