Singapore, February 08, 2017 -- Moody's Investors Service has today revised the outlook on Indonesia's
government ratings to positive from stable.
Concurrently, Moody's has affirmed Indonesia's Baa3
issuer rating, Baa3 senior unsecured bond ratings, and (P)Baa3
senior unsecured MTN program rating.
The key drivers of the change in outlook are emerging signs of a reduction
in structural constraints on Indonesia's rating, including
its level of external vulnerability and the strength of its institutions:
1) Indonesia's vulnerability to external shocks is declining somewhat
and is expected to continue to do so, as a result of measures fostering
narrower current account deficits, higher foreign exchange reserves,
and a slower rise in private sector external debt; and
2) Indonesia's lengthening track record of macroeconomic stability
and fiscal discipline, together with its measured but ongoing progress
on structural economic, fiscal and regulatory reforms, suggest
that policy effectiveness is improving.
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, and their ratings automatically reflect
changes to Indonesia's sovereign ratings.
RATINGS RATIONALE
RATIONALE FOR THE POSITIVE OUTLOOK
Indonesia's credit profile exhibits two particular features which
have until now constrained the rating to Baa3: its reliance on external
capital and consequent exposure to an external shock which leads to that
capital being withdrawn; and the relative weakness of its institutions
and related policy effectiveness. Moody's decision to revise
the rating outlook to positive from stable is based on its view that both
constraints show signs of easing.
First, external vulnerabilities have eased and are likely to continue
to do so. Partly as a result of government policies --
which we expect to remain in place -- the overall balance
of payments has been restored to health despite the persistence of low
commodity prices and sporadic episodes of volatility in capital flows.
The current account deficit fell from over 3% of GDP in 2013 and
2014 to an estimated 1.8% in 2016 as the goods trade balance,
inclusive of the cost of insurance and transportation, reverted
to a surplus in 2015. We expect Indonesia's current account
deficits to remain moderate over the coming years.
The reduction in Indonesia's external vulnerability is in part the
result of a shift in monetary policy towards the preservation of macroeconomic
stability and away from the prior focus on short-term growth,
partly through the introduction of greater exchange rate flexibility.
The revision of fuel subsidies, which eliminated price distortions
that previously propped up demand for petroleum imports, also contributed
to narrower current account deficits. Investment in domestic manufacturing
sectors, such as automobile production, has also contributed
to import substitution.
Bank Indonesia (the central bank) and the government have better coordinated
the proper sequencing and implementation of measures that could affect
price stability and the external accounts, including the revision
of electricity tariffs and the indexation of wages.
Along with healthy foreign direct investment (FDI) inflows, these
policies contributed to a build-up of gross international reserves
to $116.4 billion as of end-2016—up from $105.9
billion a year ago— which provide a large buffer against volatility
in capital flows. Reserve adequacy has been bolstered further by
a tapering of private sector external debt, due in part to the imposition
of tighter hedging requirements by Bank Indonesia since 2015.
Second, the abovementioned shift in the focus of macroeconomic and
fiscal policy, along with ongoing structural reform efforts,
suggests that Indonesia's institutional strength -- and specifically
the effectiveness of its policy organs -- is improving.
A measured, forward-looking macro policy stance involving
both monetary tightening and lower fiscal expenditure has supported a
controlled adjustment to the terms of trade shock, in part by allowing
space for policy accommodation as the shock was absorbed, thereby
contributing to Indonesia's gradual economic recovery.
The acceleration in real GDP growth to 5.0% last year from
4.9% in 2015 coincided with continued price stability as
core inflation (excluding food, fuel and other administered commodities)
averaged 3.4% in 2016, as compared to an average of
4.5% in the preceding five-year period. We
expect GDP growth to remain higher than in most other Baa-rated
peers, while Bank Indonesia's emphasis on macroeconomic stability
should keep inflation broadly stable and within the central bank's
target range.
The government has demonstrated fiscal discipline against the backdrop
of continued revenue pressure from lower oil and gas prices in recent
years. Most recently, through the first six months of 2016,
it recorded a historically wide fiscal deficit that tested its commitment
to its full-year deficit cap of 3% of GDP; overall
revenue had declined by around 5% year-on-year,
while expenditure had risen 15.1% on account of improved
disbursements due to administrative reforms.
In response, the government implemented a tax amnesty program that
contributed an additional 0.9% of GDP in revenue,
while curtailing spending, such that overall expenditure declined
5.7% year-on-year through the second half
of the year. Overall, we estimate that the budget deficit
was kept at 2.5% of GDP, thereby preserving some scope
for fiscal support to the economy in the event of negative shocks.
Measured, but consistent, progress has been achieved in implementing
structural economic, fiscal and regulatory reforms. The series
of policy packages that the government has unveiled since September 2015
have focused on deregulation, infrastructure development,
and the selective liberalization of sectors previously closed to foreign
investment.
As a result, Indonesia's rankings in cross-country
surveys, such as the World Bank's Doing Business report and
the institutional sub-score in the World Economic Forum's
Global Competitiveness Index, have improved. That said,
evidence of the reforms spurring investment has been mixed: while
net FDI inflows have picked up, the growth of realized investments
monitored by the Investment Coordinating Board and gross fixed capital
formation in the national accounts have seen only limited improvement.
More tangible evidence of a strengthening in private investment,
as the reform program unfolds, would both enhance potential growth
and further support the view that government and policy effectiveness
are improving.
RATIONALE AFFIRMING THE Baa3 RATING
Indonesia's Baa3 government rating incorporates credit strengths,
such as the size of the country's economy and its robust growth
performance relative to those of peers, low government indebtedness,
and a stable -- if shallow -- banking system
that poses limited contingent risks to the sovereign.
At the same time, the Baa3 rating reflects the constraints described
above, including the vulnerability arising from the broad reliance
on external sources of funding, as represented by the large proportion
of foreign currency-denominated debt relative to total government
debt, and the high proportion of non-resident investment
in the local currency-denominated government debt market.
This reliance on external capital partly reflects the shallow nature of
the domestic financial system.
Moreover, despite the improvement in policy effectiveness implied
by gains in macroeconomic and fiscal management, Indonesia continues
to fare worse than comparably-rated peers in other important aspects
of institutional strength, in particular, in the areas of
rule of law and control of corruption.
Finally, Indonesia's sovereign credit profile is constrained
by weak revenue performance—currently revenue as a share of GDP
is the lowest among investment grade countries—which has had a negative
impact on the government's capacity to support economic growth and
has led to a deterioration in debt affordability in recent years.
Nevertheless, we expect the government to remain committed to keeping
the deficit under the statutory ceiling of 3% of GDP and to be
able to deliver on its commitment, thereby keeping the stock of
government debt low as compared to that of peers.
COUNTRY CEILINGS
Moody's has also raised Indonesia's local currency bond and deposit
ceilings to A1 from A3. The change reflects a revised view of the
economy's vulnerability to external shocks, as well as a repositioning
for consistency with peers such as India. The Baa2/P-3 country
ceiling for foreign currency (FC) debt and Baa3/P-3 country ceiling
for FC bank deposits remain unchanged. These ceilings act as a
cap on the ratings that can be assigned to the FC obligations of other
entities domiciled in the country.
WHAT COULD CHANGE THE RATING -- UP
An upgrade would result from further progress in sustainably reducing
external vulnerabilities, while at the same time demonstrating enhanced
institutional strength. One positive indication of this development
would be a reduction in the government's reliance on external debt.
Another would be further tangible evidence of enhanced government and
policy effectiveness, not simply through the enactment of further
reforms, but through the impact of those reforms on domestic and
external investment and on competitiveness; and also through growth
in the level, diversity and sustainability of government revenues.
WHAT COULD CHANGE THE RATING -- DOWN
A downgrade is unlikely, given the positive outlook. We could
revise Indonesia's rating outlook to stable if: 1) evidence
built up that the nascent institutional strengthening is on hold,
or reversing, particularly if associated with an unraveling of current
macroeconomic and structural reform efforts; 2) we perceived that
the government is unable to improve revenue performance, indicating
limitations to policy effectiveness and posing continued constraints to
economic growth; 3) we changed our expectations of the growth outlook
to predict a material and durable weakening in economic performance relative
to peers; and/or 4) a domestic or external shock increased the likelihood
that fiscal, debt, or balance of payments metrics would weaken
significantly from current levels.
GDP per capita (PPP basis, US$): 11,149 (2015
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.9% (2015 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 3.4%
(2015 Actual)
Gen. Gov. Financial Balance/GDP: -2.6%
(2015 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.0% (2015 Actual)
(also known as External Balance)
External debt/GDP: 36.1% (2015 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 06 February 2017, a rating committee was called to discuss the
rating of the Government of Indonesia. 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, has not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed. The systemic risk in which the issuer
operates has not materially changed. The issuer has become less
susceptible to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. 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 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
VP - Senior Credit Officer
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
Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
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
