Moody's Investors Service has assigned a provisional rating of (P)Baa3 to the proposed US dollar trust certificates to be issued by Perusahaan Penerbit SBSN Indonesia III (PPSI III) under its existing trust certificate issuance program. The payment obligationsassociated with these certificates are direct obligations of the Government of Indonesia.
"The Government of Indonesia's latest Sukuk offering reflects the growing interest in Islamic finance as a source of sovereign funding," commented Khalid Howladar, Global Head of Islamic Finance at Moody's Investors Service. "Indonesia has been one of the most active issuers of sovereign sukuk over the past few years."
"Moody's Baa3 government bond rating on Indonesia reflects healthy economic prospects, structurally narrow fiscal deficits, and low public indebtedness as compared to rating peers," notes Christan de Guzman, lead sovereign analyst for Indonesia.
In Moody's opinion, the payment obligations represented by the securities to be issued by PPSI III are ranked pari passu with other senior, unsecured debt issuances of the Government of Indonesia. As such, Moody's (P)Baa3 rating to the proposed Sukuk issuance is in line with the Government of Indonesia's Baa3 issuer rating given that any direct government obligation whose repayment is handled by the Government of Indonesia receives a rating equivalent to that of the government. Moody's expects to remove the provisional status of the rating upon the closing of the proposed issuance and a review of its final terms.
Moody's also notes that its Sukuk rating does not express an opinion on the structure's compliance with Shari'ah law.
Indonesia's Baa3 government bond rating is supported by healthy economic prospects, structurally narrow fiscal deficits, and low public indebtedness as compared to rating peers. The country's very large scale and ample natural resource endowment also buttress the rating, although GDP per capita is still low amongst investment grade countries. The government's low debt burden, favorable maturity profile, and high debt affordability—as represented by interest payments as a proportion of revenue—are well-placed among similarly rated countries and guard against refinancing risks.
Credit challenges include a relatively shallow and volatile domestic capital market, which contributes to Indonesia's reliance on external funding. Consequently, non-resident holdings comprise a fairly large proportion of government securities, which in turn render financing conditions susceptible to external financial shocks. In addition, the Indonesian non-financial corporate sector has increased its foreign currency indebtedness since 2010 and the country's cross-border debt servicing requirements have risen accordingly.
On the fiscal side, weak revenue mobilisation and a still sizeable subsidy bill constrain our assessment of fiscal strength. Effective management has kept fiscal deficits in check, but is counterbalanced by relatively weak governance, as evidenced by the World Bank's cross-country surveys of institutional quality.
Indonesia's external payments position has stabilized since mid-2013. At that time, a widening current account deficit coincided with portfolio outflows on the back of the prospective tapering of the US Federal Reserve's quantitative easing program. Since then, the current account deficit has narrowed to more sustainable levels, while foreign exchange reserves have increased, rising to $110.5 billion in July 2014 from a recent low of $92.7 billion in July 2014.
The policy response, which included monetary tightening and subsidy rationalisation, has also contributed to a fall in inflation, from a multi-year high of 8.8 per cent year-on-year in August 2013 to 4.5 per cent in July 2014. At the same time, real GDP growth has decelerated to 5.1 per cent year-on-year in the second quarter of 2014, the slowest pace of expansion in four years.
The recently concluded presidential elections produced a favourable market outcome, but Moody's does not expect large policy shifts from the incoming administration of president-elect Joko Widodo.