Moody’s assigns (P)Baa3 to Indonesia’s planned MTN issuance

Photo by Finance Ministry

Singapore, June 29, 2017 — Moody’s Investors Service has assigned provisional (P)Baa3 senior unsecured debt ratings to the USD and/or EUR-denominated bonds to be issued under the Government of Indonesia’s (Baa3 positive) $50 billion global medium-term note (MTN) programme.

Moody’s expects to remove the provisional status of the rating upon the closing of the proposed issuance, and a review of the final terms.

RATINGS RATIONALE

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 weak rule of law and control of corruption according to the Worldwide Governance Indicators, as well as a shallow domestic capital market, which contributes to Indonesia’s 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 from over 3% as recently as 2014 as the goods trade balance reverted to a surplus starting in 2015.

The shortfall in the current account further narrowed to 1.0% in the first quarter of 2017 and, along with net inflows of foreign direct and portfolio investments, contributed to a build-up of gross international reserves to $124.9 billion as of end-May 2017—close to the record high of $124.6 billion reached in August 2011— which provides 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, as well as a revision in fuel subsidies.

The Indonesian government has also pursued structural economic, fiscal and regulatory reforms, although these reforms have not yet provided a significant boost to private sector investment.

Moreover, the government has demonstrated fiscal discipline against the backdrop of continued revenue pressure from lower oil and gas prices in recent years.

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.