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Indonesia sovereign credit rating: Update November 2021
Indonesia rating is BBB+ for Fitch rating, which is higher than India. In this rating, Indonesian peers in majority are high GDP per capita country at 11.500 USD while Indonesia GDP percapita is still 4.200 USD
Fitch rating see Indonesia GDP growth at 6.8 % in 2022 and over the next few years will be around 6 %. This figure is much more optimistic than IMF projection under Indian Chief Economist
This will likely give more potency for Indonesia government bond to have lower yield in which at the moment Indonesia government bond yield is still higher than its peers in the same rating (BBB+)
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Fitch Affirms Indonesia at 'BBB'; Outlook Stable
Mon 22 Nov, 2021 - 6:09 AM ET
Fitch Ratings - Hong Kong - 22 Nov 2021: Fitch Ratings has affirmed Indonesia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
Indonesia's rating balances a favourable medium-term growth outlook and a still low, but rising, government debt/GDP ratio against a high dependence on external financing, low government revenue and lagging structural features such as governance indicators and GDP per capita compared with 'BBB' category peers.
Economic activity in Indonesia is recovering gradually after a strong Covid-19 surge from June through August that constrained domestic demand.
Fitch expects real GDP to grow by 3.2% in 2021, although there is upside potential to our forecast from a swift recovery in mobility in 4Q21 and continued high prices of Indonesia's export commodities. Indonesia's vaccination drive has accelerated in recent months, but still lags behind many of its peers, with close to 50% of the population inoculated with a first dose and just over 30% fully vaccinated as of mid-November. We forecast growth to accelerate to 6.8% in 2022, with the main risks relating to the evolution of the pandemic. Thereafter, we expect growth to remain at around 6% over the next few years, as the negative output gap from the pandemic closes gradually. Growth should also receive a boost from the implementation of the Omnibus Law on Job Creation, passed about a year ago, which aims to alleviate long-standing barriers to investment.
The severe Covid-19 surge earlier this year has put further pressure on fiscal metrics, as it prolonged the need for relief spending, weakened the balance sheets of state-owned enterprises, and lowered the government's revenue intake. Parliament has nevertheless passed new revenue-enhancing measures in a tax reform law in October, which includes a rise in the VAT rate by 1pp to 11% from April 2022, a voluntary disclosure programme, and implementation of a carbon tax. The government expects implementation of the tax reform law to yield an additional 0.8% of GDP in tax revenue in 2022, mostly from the VAT rate hike. Long-standing challenges to raising the revenue ratio more significantly remain in our view, including to expand the tax base and improve compliance. Nevertheless, the reform should help the government to meet its ambitious deficit target of below 3% of GDP in 2023, when the budget ceiling will be reinstated.
Fitch forecasts the fiscal deficit to decline to 4.5% in 2022 from 5.4% in 2021. These are slightly narrower than the targets presented in the government's 2022 budget of 4.9% and 5.8%, respectively, which exclude the positive impact of the tax reform. There is a risk of higher relief spending, depending on the evolution of the pandemic, although other government expenditures are likely to fall short of spending targets. By mid-November, the government had spent only just over 65% of the budgeted 4.5% of GDP in 2021 for its Covid-19-related measures. The National Economic Recovery Programme entails a broad range of measures to support households and companies affected by the pandemic, including food assistance, cash transfers, discounted electricity prices, temporary tax relief and tax incentives, wage subsidies, and support for SMEs through a credit restructuring scheme and working capital credit.
The pandemic has caused a significant rise in Indonesia's general government debt, in line with its rating peers. We forecast debt to rise to 43.1% of GDP by end-2021, from a pre-pandemic level of 30.6% in 2019, still well below the 'BBB' category median (60.3%). We expect the debt ratio to peak at 45.1% of GDP in 2022 before declining gradually, facilitated by the resumption of strong GDP growth and tighter fiscal policy. However, the government debt-to-revenue ratio will rise to 341% by end-2021, well above the peer median of 253%.
Low revenue and high non-resident holdings of local-currency debt exacerbate the challenges of financing the higher deficits in our view, which the authorities have sought to ease through direct central bank financing. The Ministry of Finance and Bank Indonesia (BI) announced an extension of their "burden-sharing arrangement" and financing arrangements through 2022 in August, which they had previously committed would not be extended beyond 2021. Monetary financing arrangements include a private placement with BI amounting to 1.3% of GDP in 2021 and 1.2% in 2022 and purchases in the primary market if deemed necessary, while the central bank financed around 3% of GDP in 2020.
These financing arrangements are helping to keep government interest costs down and free up resources for relief measures, but they run the risk of government interference in monetary policymaking. The authorities have emphasised that the independence of the central bank is not in doubt and the policy for this and next year has been instituted at the central bank's initiative. Market participants have so far reacted positively to the extension of the arrangements, with bond yields and the exchange rate remaining broadly stable. However, prolonged monetary financing could eventually undermine investor confidence and weigh on Indonesia's credit profile, especially if emerging markets come under pressure as global liquidity conditions tighten.
BI's foreign-exchange reserves strengthened to USD145.5 billion by end-October 2021 from USD121.0 billion at end-March 2020, and will cover 7.0 months of current account payments at end-2021, according to Fitch forecasts (BBB median: 7.7 months). Foreign direct investment has also recovered in 2021, with investments in several sectors, including electric-vehicle production. Higher FDI inflows and swap lines with other central banks, strengthen Indonesia's external resilience. Nevertheless, we believe Indonesia remains more vulnerable than many of its peers to shifts in investor sentiment towards emerging markets, given the high dependence on portfolio inflows and commodity exports, and external debt ratios that are above peer medians.
Continued weak price pressure from the negative output gap and limited pass-through of higher international oil prices to retail fuel prices should keep inflation within BI's target range of 2%-4% in the near term. We expect the central bank to discount the price increase from the VAT rise, estimated by the authorities at 50bp, but to nonetheless hike its policy rate by 50bp to 4.0% at end-2022 in light of its mandate to focus on both internal and external price stability, and to mitigate or pre-empt any market pressure from the US Fed's tightening policies.
The low revenue intake and rising interest payments of 16.5% of revenue in 2021 may reduce the state's capacity to invest in infrastructure, which remains a key medium-term priority for the government. The authorities are also constrained by constitutionally mandated spending on health and education, and the possible need for further capital support to state-owned enterprises. The Indonesia Investment Authority, established February 2021, is intended to help finance infrastructure development over the next few years from a combination of public and foreign official and private funds, including through disinvestment of government assets, such as toll roads. This may help to finance more infrastructure development over time, which would support medium-term growth.
The Indonesian economy is less developed on a number of structural metrics than many of its peers. Indonesia's average per capita GDP of USD4,175, for example, is significantly lower than the 'BBB' category median of USD11,428.
ESG - Governance: Indonesia has an ESG Relevance Score of '5' for Political Stability and Rights and '5[+]' for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators have in our proprietary Sovereign Rating Model. Indonesia has a medium World Bank Governance Indicator ranking at the 47th percentile (BBB peer median: 59th), reflecting a recent record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a high level of corruption.
Moody Rating, September 2021
Rating Action:
Moody's assigns Baa2 ratings to Indonesia's US dollar and Euro bonds
14 Sep 2021
Singapore, September 14, 2021 -- Moody's Investors Service ("Moody's") has assigned Baa2 ratings to the senior unsecured US dollar and Euro notes issued by the Government of Indonesia (Baa2 stable). These bonds are issued under the Government of Indonesia's USD 10 billion shelf programme. The issuances have maturities up to 40 years.
The proceeds of the notes will be used to conduct a liability management exercise, including to fund a tender offer to repurchase a portion of its bonds maturing between 2022 and 2026 in exchange for cash. Proceeds are also intended for general budgetary purposes, including to partially fund its Covid-19 relief and recovery efforts.
According to the terms and conditions available to Moody's, the notes to be issued will constitute direct, unconditional and unsubordinated obligations of the Government of Indonesia (the issuer). The notes will rank pari passu with all of the Government of Indonesia's current and future senior unsecured external debt.
The rating mirrors the Government of Indonesia's long-term issuer rating of Baa2 with a stable outlook.
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. The large size of its economy and healthy and stable growth prospects act as credit supports. Credit challenges include low revenue mobilization, and a reliance on external funding.
The coronavirus pandemic has dealt a severe blow to private sector activity, and significantly dented the country's immediate growth performance. The success of ongoing measures to curb infection rates and accelerate the pace of vaccination will determine the extent of impact. While Indonesia's current account and budget deficits are low, any prolonged risk aversion will weigh on already weak debt affordability and test external buffers.
Sizeable non-resident investment in Indonesia exposes the country to swings in capital inflows, 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 forbearance measures are rolled back.
The stable outlook reflects balanced risks at Baa2. It incorporates downside risks from political challenges to further implementation of broad economic, fiscal and regulatory reforms. Because they seek to address entrenched constraints and go through various institutional hurdles, we expect effective reforms to proceed relatively slowly, with potential delays to occur.
The stable outlook also takes into account upside risks from a potential improvement in competitiveness as a result of effective reform implementation.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental risks are a material credit consideration for Indonesia. Coastal flooding and rising sea levels are a particular concern, with widespread implications, including for agricultural production and food security. In 2019, the government announced its plan to relocate the country's capital city to Kalimantan from Jakarta, in part because the existing capital is particularly vulnerable to rising sea levels and its associated effects. Separately, demand for arable land and intensive commercial logging have led to soil erosion and deforestation. In addition, given its geographical location, Indonesia is subject to considerable seismic activity that are manifested in natural disasters such as earthquakes, tsunamis and volcanos.
Social considerations exert limited influence on Indonesia's credit profile. Demographics act as a credit support, given a sizeable and growing working age population. However, Indonesia's education quality and spending fall behind global standards, and therefore, the government plans to increase fiscal spending to improve the quality of human capital. Moreover, wealth is concentrated and Indonesia's rankings on wealth inequality indices are weak.We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
Governance considerations relevant to Indonesia's credit profile are captured in our assessment of institutional strength. Although Indonesia lags peers in terms of Worldwide Governance Indicators with rule of law representing particular challenges, percentile rankings point to steady improvement.
This credit rating and any associated review or outlook has been assigned on an anticipated/subsequent basis. Please see the most recent credit rating announcement posted on the issuer's page on www.moodys.com, under the research tab, for related economic statistics included in rating announcements published after June 3, 2013.
This credit rating and any associated review or outlook has been assigned on an anticipated/subsequent basis. Please see the most recent credit rating announcement posted on the issuer's page on www.moodys.com, under the research tab, for related summary rating committee minutes included in rating announcements published after June 3, 2013.
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 if: 1) 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; 2) evidence indicates that the gradual strengthening of Indonesia's policy framework and institutions stalls or reverses; 3) a meaningful deterioration in the external position were to occur, such as from prolonged currency depreciation or capital outflows, with ramifications for debt affordability.
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 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.
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 www.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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.
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 www.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 www.moodys.com.
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
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JOURNALISTS: 852 3758 1350
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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.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
