Singapore, January 28, 2016 -- Moody's Investors Service has today affirmed the Government of Indonesia's
Baa3 issuer rating, Baa3 senior unsecured bond ratings, and
(P)Baa3 senior unsecured MTN program rating with a stable outlook.
The key drivers of the affirmation are Moody's expectations that:
1. Indonesia will maintain its strong balance sheet against the
current backdrop of widening fiscal deficits; and
2. Policymakers will continue to effectively manage the risks from
lower commodity prices and weaker growth to ensure the sustainability
of Indonesia's external payments position.
In a related rating action, Moody's has affirmed the (P)Baa3
senior unsecured MTN programme rating and Baa3 senior unsecured ratings
of the US dollar trust certificates issued by Perusahaan Penerbit SBSN
Indonesia III, a special purpose vehicle established by the Government
of Indonesia. The payment obligations associated with these certificates
are direct obligations of the Government of Indonesia, and its ratings
automatically reflect changes to Indonesia's sovereign ratings.
RATINGS RATIONALE
FIRST DRIVER -- LOW DEBT LEVELS DESPITE FISCAL PRESSURES
The first driver of the affirmation is the government's strong balance
sheet. At an estimated 26.8% of GDP in 2015,
Indonesia's government debt levels are lower than the Baa-rated
median of 43.8% and all but two of the Group of 20 group
of systemically important countries.
Since reaching a trough of 23.0% of GDP in 2012, government
debt has risen by nearly four percentage points of GDP on account of widening
fiscal deficits, driven by lower revenue. In 2015,
the fiscal deficit widened to an estimated 2.8% of GDP,
just below the deficit ceiling of 3% of GDP. Government
revenue likely dropped below 13% of GDP in 2015, the lowest
among investment-grade countries, as weaker commodity prices
have weighed on oil and gas receipts. Direct oil and gas receipts
accounted for 19.6% of total revenue in 2014, the
latest year for which data are available.
Notwithstanding those trends, we expect the government's demonstrated
commitment to the fiscal deficit ceiling to keep debt levels low by comparison
with peers. Deficits have consistently been below the statutory
limit since its implementation in 2003. In response to pressure
on revenue over the past couple of years, the administration has
restrained expenditure, notably through the politically difficult
rationalization of energy subsidies. While the government's
ambitious infrastructure development agenda and calls for fiscal accommodation
to address slowing economic growth could test policymakers' adherence
to prevailing fiscal rules, we would not expect to see a substantially
lower commitment to containing the government's indebtedness.
Weaker revenue mobilization has not only constrained fiscal room for maneuver,
but has led to a deterioration in debt affordability. Despite the
low level of debt, the ratio of interest payments-to-revenue
rose to an estimated 10.4% in 2015, higher than the
Baa median of around 9% and up from a low of 7.5%
in 2012. Given the trend depreciation of the rupiah since 2013,
the relatively high proportion of government debt denominated in foreign
currency--around 45% as of the end of 2015--has
also weighed on debt affordability.
SECOND DRIVER -- POLICY RESPONSE AND REFORM MOMENTUM MITIGATE EXTERNAL
RISKS
The second driver reflects our expectation that Indonesia's policy
response will continue to be sufficient to weather the ongoing volatility
from external headwinds.
Since the financial turbulence that initially disrupted a number of emerging
markets in 2013, Indonesia's policymakers have engineered a macroeconomic
adjustment that has directly addressed investor concerns over external
imbalances. Policy tightening contributed to the slowing of economic
growth and hence import compression. As a consequence, the
current account deficit narrowed to less than 2% of GDP through
the first three quarters of 2015 from over 4% in mid-2013,
despite lower prices for commodity exports. At the same time,
Bank Indonesia has allowed greater exchange rate flexibility, helping
to rebuild reserve buffers with gross international reserves climbing
to $105.9 billion as of the end of 2015 from $93.0
billion in August 2013. In addition, Bank Indonesia has renewed
or enlarged existing bilateral swap arrangements with regional central
banks, and recently concluded a new agreement with the Reserve Bank
of Australia.
Nevertheless, Indonesia continues to be exposed to capital flow
volatility. Net foreign direct investment does not completely offset
the narrower current account deficits. The government is reliant
on international sovereign issuances to meet a significant portion of
its gross borrowing requirements, while non-resident investors
hold close to 40% of rupiah-denominated government bonds.
Private sector external debt has increased significantly since 2010,
although total external debt remains at levels below comparably rated
sovereigns.
In mitigation, policymakers have initiated a reform program intended
to spur investment to support Indonesia's balance of payments,
improve competitiveness in natural resource sectors, as well as
diversify sources of growth away from the commodities production.
The series of policy packages that the government has unveiled since September
2015 have focused on streamlining investment bottlenecks and deregulation,
while speeding up disbursements for infrastructure development.
However, Indonesia's track record of implementation temper
the prospects for sustained improvements to Indonesia's credit profile.
In addition, the central bank has sought to strengthen onshore liquidity
management to help stabilize the exchange rate and offset currency risks
to the private sector by instituting hedging requirements for foreign
currency borrowers.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects our view that Indonesia's sovereign
credit profile will remain resilient to current pressures from lower commodity
prices and international financial volatility. Heightened external
volatility poses risks, given a reliance on external financing.
And lower terms of trade have slowed economic growth. But growth
remains higher than similarly rated peers. Overall levels of public
and private external debt are low, and the government's fiscal
strength is stronger than other similarly rated peers. Upside risks
to growth and investment could result from the recent acceleration in
reform momentum and infrastructure spending, although these are
balanced against Indonesia's mixed track record of implementation.
WHAT COULD CHANGE THE RATING -- UP
An upgrade could be prompted by: 1) a sustainable increase in government
revenue, most likely driven by diversification of revenue sources;
2) a sustained improvement in the current account deficit and inflation;
3) progress addressing infrastructure and regulatory bottlenecks;
and/or 4) marked a deepening of local capital and credit markets that
would ease the government's reliance on external financing.
WHAT COULD CHANGE THE RATING -- DOWN
A downgrade would most likely be prompted by: 1) the expectation
that growth would remain weak over an extended period, particularly
if associated with a reversal of current macro-economic and structural
reform efforts; and/or 2) a domestic or external shock that increased
the likelihood that fiscal, debt, or balance of payments metrics
would weaken significantly from current levels.
SUMMARY OF MINUTES FROM RATING COMMITTEE
GDP per capita (PPP basis, US$): 10,651 (2014
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 5% (2014 Actual) (also
known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 8.4%
(2014 Actual)
Gen. Gov. Financial Balance/GDP: -2.2%
(2014 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.1% (2014 Actual)
(also known as External Balance)
External debt/GDP: 33.1% (2014 Actual)
Level of economic development: High level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 26 January 2016, 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 not materially changed.
The issuer's institutional strength/ framework, have not materially
changed. The issuer's governance and/or management, have
not materially changed. The issuer's fiscal or financial strength,
including its debt profile, has materially decreased. The
systemic risk in which the issuer operates has not materially changed.
The issuer's susceptibility to event risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2015. Please see the Credit Policy 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 ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings 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 for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement 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 to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Christian de Guzman
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
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Anne Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Moody's affirms Indonesia's Baa3 sovereign rating, outlook stable
