Singapore, April 13, 2018 -- Moody's Investors Service ("Moody's") has today upgraded
the Government of Indonesia's long-term issuer and senior unsecured
ratings to Baa2 from Baa3. The outlook is changed to stable from
positive.
The upgrade to Baa2 is underpinned by an increasingly credible and effective
policy framework conducive to macroeconomic stability. Together
with a build-up of financial buffers, prudent fiscal and
monetary policy strengthens Moody's confidence that the sovereign's
resilience and capacity to respond to shocks has improved. As a
result, Indonesia's credit metrics are more comparable to
sovereigns at the Baa2 level.
Concurrently, Moody's has upgraded Indonesia's senior unsecured
MTN rating to (P)Baa2 from (P)Baa3. Moody's has also upgraded to
Baa2 from Baa3 the senior unsecured and backed 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; and the senior unsecured MTN programme of Perusahaan
Penerbit SBSN Indonesia III to (P)Baa2 from (P)Baa3.
The payment obligations associated with these certificates are direct
obligations of the government, and their ratings automatically reflect
changes to Indonesia's sovereign ratings.
Moody's has also raised Indonesia's long-term foreign currency
(FC) bond ceiling to A3 from Baa2 and its long-term FC deposit
ceiling to Baa2 from Baa3. In addition, Moody's has raised
the short-term FC bond and deposit ceilings to P-2 from
P-3. These ceilings act as a cap on the ratings that can
be assigned to the FC obligations of other entities domiciled in the country.
Indonesia's local currency bond and deposit ceilings remain unchanged
at A1.
RATINGS RATIONALE
RATIONALE FOR THE UPGRADE TO Baa2
Effective policy emphasis on macroeconomic stability increases resilience
to shocks.
Moody's expects that the focus of Indonesia's fiscal and monetary
policy around preserving macroeconomic stability and building financial
buffers that has become increasingly apparent in recent years will remain.
These policies and larger financial reserves are strengthening Indonesia's
capacity to respond to shocks.
On the fiscal front, the government has maintained strict adherence
to the 3.0% budget deficit cap since its institution in
2003; Moody's expects the focus on fiscal prudence to remain
in place and contribute to macroeconomic stability. Sustained low
deficits keep the debt burden low and, combined with a long tenor
of funding, reduce financing needs and risks. Although weak
revenue remains a long-standing credit constraint, including
by eroding debt affordability, Moody's forecasts that Indonesia's
government debt will hover around 30% of GDP in the next few years,
below the median of 39% of GDP for all investment grade sovereigns
and 46.2% for the Baa-rated median.
Contingent liability risks related to state-owned enterprises (SOEs)
are likely to increase as SOEs assume more leverage in the implementation
of infrastructure projects, but does not pose a significant risk
to Indonesia's fiscal strength in the next few years. Moody's
also expects that some SOEs and infrastructure projects will continue
to face financing constraints, resulting in less ambitious infrastructure
spending plans. While negative for medium-term growth,
a scaled-down infrastructure implementation will limit potential
contingent liability risks.
On the monetary policy front, Bank Indonesia (BI), the central
bank, has established a track record of prioritizing macroeconomic
stability over promoting short-term growth. Inflation targets
have been met for the past three consecutive years and inflation expectations
have proved to be anchored at moderate levels when headline inflation
increased sharply as a result of the subsidy reform in 2014. A
number of factors, including the central bank's more flexible
approach towards currency intervention since the episode of global financial
market turmoil in mid-2013 (the so-called taper tantrum),
and more effective policy coordination between BI and the central and
regional governments keep inflation stable at low levels.
Going forward, temporary price pressures may emerge in a less benign
external price environment. However, the central bank has
displayed greater willingness to use macro-prudential tools in
response to shocks, which suggests a lower risk of a large and persistent
rise in inflation than in the past.
Moreover, a strengthening of Indonesia's external position
and build-up of reserve buffers also enhances the country's
resilience to potential shocks. While some of the acceleration
in exports in 2017 is accounted for by the cyclical strengthening of global
demand and recovery in commodity prices, structural improvements,
including some diversification of the export base away from commodities
and towards the manufacturing sector, have also played a role in
narrowing the current account deficit. This is reflected in a steady
increase in the share of manufacturing exports to 72% of total
exports in 2017 from 62% in 2013, while the share of commodity
exports had moderated. We expect the current account deficit to
be broadly stable, at low levels, around 1.8%
of GDP.
As a result of the narrowing current account deficit and robust investment
inflows, foreign reserves increased to $119 billion at the
end of March (gross international reserves increased to $126 billion),
a level consistent with measures of reserve adequacy. Moody's
External Vulnerability Indicator for Indonesia, which measures the
ratio of long-term debt maturing over the next year and short-term
debt relative to the stock of reserves, is 51.3% for
2018, which indicates ample buffers and limited external vulnerability.
A credible policy focus on macroeconomic policy backed by substantial
financial buffers reduces the risk of a sharp and sustained depreciation
of the currency.
The policy framework and financial buffers complement Indonesia's
large economic size, robust and stable GDP growth around 5.0-5.3%
and a sound banking system in fostering the sovereign's capacity
to absorb economic or financial shocks.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects balanced risks at Baa2. The stable
outlook incorporates downside risks from political challenges to the implementation
of further broad economic, fiscal and regulatory reforms.
While we expect effective reforms to proceed relatively slowly,
further delays or reversals compared with our expectations could happen,
especially - although not only - ahead of next year's
elections, when reforms involve increasing competition with a negative
impact on incumbents.
The stable outlook also takes into account upside risks from a potential
improvement in competitiveness as a result of effective announced and
planned reforms.
The present administration has passed various policy packages targeted
primarily at improving the environment for investment. The effectiveness
of these policies in improving the attractiveness of Indonesia as a place
to invest has yet to become clear. Policy-makers'
perseverance in this direction is key to ensuring that GDP growth moves
towards the country's potential levels.
WHAT COULD MOVE THE RATING UP/DOWN
The stable outlook indicates that rating changes are unlikely in the foreseeable
future.
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
potentially result from materially stronger growth potential, commensurate
with the country's population growth and income levels, including
through a deepening of financial markets and improved competitiveness.
Downward pressure would arise if: 1) evidence built up that the
strengthening of Indonesia's policy framework and institutions is
on hold or reversing; 2) Moody's concluded that the prospects
of some broadening of the revenue base over the medium term are very limited,
indicating limitations to policy effectiveness and posing continued constraints
to economic growth; and/or (3) SOEs' financial strength materially
worsened pointing to a rising likelihood of crystallization of material
contingent liabilities on the government's balance sheet.
GDP per capita (PPP basis, US$): 11,717 (2016
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 5.0% (2016 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 3% (2016
Actual)
Gen. Gov. Financial Balance/GDP: -2.5%
(2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -1.8% (2016 Actual)
(also known as External Balance)
External debt/GDP: 34.3% (2016 Actual)
Level of economic development: High level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 10 April 2018, 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 increased. The issuer's institutional
strength/framework, have increased. The issuer's fiscal or
financial strength, including its debt profile, has decreased.
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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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.
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
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 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
Client Service: 852 3551 3077
