Singapore, February 10, 2022 -- Moody's Investors Service ("Moody's") has today
affirmed the Government of Indonesia's ("Indonesia") local and foreign
currency long-term issuer ratings at Baa2 and maintained the stable
outlook. The local and foreign currency senior unsecured ratings
and the MTN and shelf program ratings were also affirmed at Baa2 and (P)Baa2,
respectively.
The affirmation of the rating is supported by continued economic resiliency
and Moody's expectations that monetary and macroeconomic policy
effectiveness will be maintained, containing risks as global interest
rates rise. Following the hit to growth from the pandemic,
Moody's expects economic activity to revert to its historical average
in 2023, with growth sustaining at those rates thereafter.
While factoring in some challenges to effective implementation,
Moody's expects that recently passed structural reforms will support
investment and export competitiveness, and limit any economic scarring.
The Baa2 rating also takes into consideration relatively weak fiscal strength.
In particular, debt affordability is very weak, although the
government has kept the debt-to-GDP ratio at levels well
below those of similarly-rated peers. Recently approved
revenue reforms and plans toward fiscal normalization will support a stabilization
in the debt burden by 2023.
The stable outlook reflects balanced risks. Moody's expects
reforms to be implemented at a gradual pace, with some delays or
refinements likely to occur, overall maintaining growth and fiscal
metrics at current levels. Materially more or less effective reforms
than currently assumed would have implications for Indonesia's credit
profile. Moody's baseline expectation is also for fiscal
and monetary measures taken in response to the pandemic - in particular
the central bank's financing of fiscal deficits - to be normalized
or reversed by the end of this year, in line with government targets.
An effective policy exit will inform overall policy credibility,
with implications for foreign investor confidence, debt flows,
the currency and inflation.
Concurrently, Moody's has affirmed the backed senior unsecured ratings,
and the backed senior unsecured MTN programme rating of the US dollar
trust certificates issued by Perusahaan Penerbit SBSN Indonesia III (PPSI
III), at Baa2 and (P)Baa2 respectively. PPSI III is a special
purpose vehicle established by the Government of Indonesia. The
associated payment obligations are direct obligations of the Government
of Indonesia and rank pari passu with other senior unsecured debt of the
government.
Indonesia's long-term local-currency (LC) bond ceiling
remains unchanged at A1 and its long-term foreign-currency
(FC) bond ceiling remains unchanged at A3. The four-notch
gap between the LC ceiling and issuer rating reflects a low likelihood
of political event risk significantly disrupting the economy and modest
external imbalances, balanced by a relatively large government footprint
in the economy and some constraints on predictability and reliability
of government policies. The two-notch gap between the LC
and FC ceiling reflects low external indebtedness and that a debt moratorium
remains unlikely.
RATINGS RATIONALE
RATIONALE FOR THE AFFIRMATION OF THE Baa2 RATING
ECONOMIC STRENGTH WILL REMAIN RESILIENT OVER THE NEAR-TERM
Moody's expects that GDP growth in Indonesia will return to a 5.0%
average over the next two years, similar to pre-pandemic
GDP rates. However, as with emerging markets globally,
potential growth rates in Indonesia have steadily declined over the last
decade, and now face additional pressures from economic scarring
following the pandemic. The long-run effects on the labor
market from lost years of schooling and job losses are not yet clear,
although government efforts have aimed to mitigate these impacts.
An improvement in investment activity, particularly for small and
medium enterprises, will also depend on continued policy support
from the government until ongoing efforts to encourage private sector
participation bear fruit. However, fiscal constraints may
limit the extent and form of policy support that can be provided over
a longer-horizon.
Moody's expects that actual GDP growth will be slightly above potential
in the next 2-3 years, particularly given that the economy
will be in a recovery phase with output gaps still prevalent, and
buoyed by low base effects. At these projected rates, growth
will trend above the median for Baa-rated sovereigns, which
is estimated at 3.7% year-on-year.
However, beyond this, the direction and pace of reform efforts,
particularly to boost capital and labor productivity, will determine
the extent of uplift to potential growth. Policy initiatives over
the past two years are directed at improving the investment environment
and boosting revenues. In 2020, the government passed the
Omnibus Law on Job Creation, aimed at improving employment and investment
through 51 new regulations, marking an important step in addressing
issues around the business climate and overall competitiveness.
In addition, fiscal reforms aimed at improving the revenue base
and improving spending efficiencies will create greater financing sources
for investment and support headline growth. To this end,
in late 2021, the government adopted a Tax Harmonization Law,
which it expects will raise tax revenues by 0.7 to 1.2 percent
of GDP per annum in 2022-2025. Towards the end of last year,
a law on central-regional fiscal relations was passed that harmonizes
spending between central and regional governments, strengthening
the taxing power and improving the accountability of provinces.
In the year ahead, the government intends to pass measures targeting
fuel subsidies, as well as steps to reform the financial sector.
Moody's does not expect these reforms to generate immediate benefits,
although they should support a preservation of growth and fiscal buffers
over the longer run.
MONETARY AND FISCAL POLICY WILL NORMALISE, UNDERPINNING POLICY CREDIBILITY
Over the past two years, the government has extended both extraordinary
fiscal and monetary support, with the central bank playing a pivotal
role in deficit financing. Under the first joint decree between
the Ministry of Finance and the central bank, Bank Indonesia (BI),
signed in 2020, the latter can step in as a standby buyer in the
primary market, should the need arise. In addition,
under the third joint decree signed between the two parties in 2021,
the MOF can issue through private placements to BI marketable and tradeable
bonds up to IDR 224 trillion in 2022 (vs. IDR 215 trillion in 2021).
BI is also responsible for the interest costs on allocations for vaccination
as well as a portion of the interest costs on other healthcare expenses.
These arrangements are scheduled to expire in 2022, after which
BI will cease its primary market activities and hold bonds purchased under
these arrangements to maturity. Moody's baseline assumption
is that such a normalization of fiscal and monetary policy support will
occur by the end of this year without being replaced by similar other
forms of extraordinary central bank monetary policy. While direct
budget financing by the BI has contributed to a normalization of bond
yields and allowed the government greater flexibility in spending policy
response to the pandemic, a timely unwinding of this policy support
will also be crucial to preserving policy credibility.
DEBT AFFORDABILITY REMAINS A FISCAL DRAG
Like most economies, fiscal stimulus was an important part of Indonesia's
response to the pandemic. Announced stimulus stood at 4.5%
of GDP in 2020, as a result of which the deficit widened to 6.1%
of GDP in 2020 from 2.2% in 2019. An additional 4.5%
of GDP worth of stimulus was announced in 2021, although strong
commodity revenues helped the budget deficit moderate to 4.6%
of GDP in 2021. The widening in the budget deficit was made possible
by the passage of regulatory measures earlier in 2020 to relax the budget
deficit ceiling of 3.0% of GDP, which had been strictly
adhered to before the pandemic.
Moody's assumes that even with a slowdown in revenue growth relative
to 2021 owing to a tempering in commodity prices, some unwinding
in spending will drive a consolidation in the fiscal deficit to 3.8%
of GDP in 2022. This will pave the way for the government to achieve
its stipulated goal of reverting to the 3.0% deficit ceiling
by 2023.
Taking this baseline assumption for deficit normalization, Moody's
expect that debt levels will drift upward until 2023, peaking at
42.5% of GDP and then stabilize around that level thereafter.
The increase in debt has not been as sizeable as compared with other emerging
markets, and the debt burden will remain significantly below the
Baa median of 64% of GDP.
While the debt-to-GDP ratio is relatively low, debt
affordability acts as a significant drag on Indonesia's fiscal profile.
The ratio of interest payments to revenues -- already weak pre-pandemic
-- worsened to 19% in 2020, as revenues contracted.
In 2021, an improvement in revenue growth coupled with lower interest
costs resulted in a slight improvement in the ratio to 17%.
However, factoring in rising interest rates globally and domestically,
Moody's expects this ratio will hover around 18% going forward.
This is materially higher than the Baa median of around 8%.
The share of foreign currency borrowing has moderated significantly over
the last two years, but at around a third of total general government
debt, continues to expose fiscal strength to shifts in external
appetite and currency fluctuations.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects the expectation that reform implementation
should continue at a steady, albeit gradual pace. Upside
and downside risks to reform implementation would not materially affect
the rating, unless potential growth outturns were materially above
peers. A key assumption behind the stable outlook is the restoration
of pre-pandemic fiscal and monetary policies, particularly
a cessation in the role of the central bank in financing fiscal spending,
enabled by a recovery in growth and a consolidation in fiscal deficits.
This predicates Moody's underlying assessment of Indonesia's
monetary and fiscal policy effectiveness. A delayed or a disorderly
exit would weigh on overall policy credibility.
ENVIRONMENTAL SOCIAL AND GOVERNANCE CONSIDERATIONS
Indonesia's ESG Credit Impact Score is moderately negative (CIS-3),
reflecting high exposure to environmental risks and moderate exposure
to social risks, contained by institutional and economic resilience.
Indonesia's overall Environmental issuer profile score is moderately
negative (E-3 issuer profile score), driven primarily by
physical climate stresses. Within physical climate risk,
coastal flooding and rising sea levels are a particular consideration,
with implications for agricultural production, infrastructure and
property, and food security. At the same time, Indonesia
is moderately exposed to carbon transition risk, with coal and palm
oil among its major export products. Demand for arable land and
intensive commercial logging have also led to soil erosion and deforestation.
Exposure to social risks is moderately negative (S-3 issuer profile
score). Population growth and a declining dependency ratio are
supportive of growth. However, wealth is concentrated and
Indonesia's rankings on wealth and income inequality indices are weak.
Spending on both health and education services are just below emerging
market standards.
Governance is neutral-to-low, in line with other similarly-rated
sovereigns and does not pose specific risks (G-2 issuer profile
score). Our assessment of institutional framework includes issues
related to rule of law and control of corruption. The government
maintains a strong track record of effective fiscal and monetary policymaking.
GDP per capita (PPP basis, US$): 12,220 (2020
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -2.1% (2020
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.7%
(2020 Actual)
Gen. Gov. Financial Balance/GDP: -6.2%
(2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -0.4% (2020 Actual)
(also known as External Balance)
External debt/GDP: 39.3% (2020 Actual)
Economic resiliency: baa1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 08 February 2022, a rating committee was called to discuss the
rating of the Indonesia, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have materially decreased.
The issuer's institutions and governance strength, have not materially
changed. The issuer's fiscal or financial strength, including
its debt profile, has not materially changed. The issuer's
susceptibility to event risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook 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's 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 from: 1) weaker policy effectiveness
or signs of diminishing policy credibility, potentially reflected
in prolonged delays or back-tracking on reforms that results in
a persistent erosion in the revenue base and debt affordability,
or which translate into a gradual loss of economic strength; 2) a
meaningful deterioration in the external position were to occur,
such as from prolonged currency depreciation or capital outflows,
with ramifications for debt affordability and reserve adequacy; and
3) a prolonged, entrenched slowdown in growth has economy-wide
impacts and fiscal repercussions, including difficulties reverting
to a declining fiscal deficit trajectory following one-time stimulus
packages.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
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provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
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if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
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Anushka Shah
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
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Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
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