Singapore, May 24, 2022 -- Moody's Investors Service ("Moody's") has today assigned Baa2 backed senior unsecured ratings to the US dollar-denominated trust certificates (sukuk) issued by the Government of Indonesia (Baa2 stable) through Perusahaan Penerbit SBSN Indonesia III ("PPSI III") under its recently enlarged $35 billion trust certificate issuance program.
The ratings apply to all the proposed tranche issuances, including those with maturities in 2027 and 2032. According to the terms and conditions available to Moody's, the trust certificates will constitute direct, unconditional and unsubordinated obligations of the Government of Indonesia (the issuer). In Moody's opinion, the payment obligations represented by the securities issued by PPSI III are ranked pari passu with all of the issuer's current and future senior unsecured external debt. The proceeds of the notes are intended for general budgetary purposes, including for financing requirements, provided for the 10-year Green Sukuk, an amount equal to the net proceeds from the sale of the trust certificates will be used exclusively to finance or re-finance "Eligible SDGs Expenditures with Green and Blue focus" as defined in Indonesia's SDGs Government Securities Framework.
The rating mirrors the Government of Indonesia's long-term issuer rating of Baa2 with a stable outlook. Moody's notes that its sukuk ratings do not express an opinion on the structures' compliance with Shari'ah law.
RATINGS RATIONALE
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 as compared to rating peers. The large size of its economy and healthy and stable growth prospects act as credit supports. Credit challenges include low revenue mobilization and consequently weak debt affordability, and as well as a reliance on external funding.
Following the severe blow to the economy wrought by the coronavirus pandemic, 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. 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. Nevertheless, growth will be slightly above potential in the next 2-3 years and above the median for Baa-rated sovereigns, particularly given that the economy will be in a recovery phase with output gaps still prevalent, and buoyed by low base effects. In addition, Indonesia stands to benefit from the positive terms of trade shock on account of the higher prices for its commodity exports resulting from the Russia-Ukraine military conflict.
Sizeable non-resident investment in Indonesia exposes the country to swings in capital flows, 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 may hurt banks' asset quality once pandemic-related forbearance measures are rolled back, although strong capitalization continues to provide ample buffers against unexpected losses.
The stable outlook reflects the expectation that reform implementation will 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, 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 exposure to environmental risks 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 (G-2 issuer profile score), in line with other similarly-rated sovereigns and does not pose specific risks. 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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
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://ratings.moodys.com/api/rmc-documents/63168. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
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 on https://ratings.moodys.com/rating-definitions.
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 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 issuer/deal page for the respective issuer on https://ratings.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.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
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 https://ratings.moodys.com/documents/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 office that issued the credit rating is available on https://ratings.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
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Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
Anushka Shah
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
71 Robinson Road #05-01/02
Singapore, 068895
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
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.
71 Robinson Road #05-01/02
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Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
