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Moody's assigns definitive Baa3 rating to Indonesian sovereign sukuk

November 20, 2012
Moody's Investors Service has assigned a definitive rating of Baa3 to the securities under the Government of Indonesia's U.S. dollar-denominated sovereign sukuk with a scheduled dissolution date in 2022.


RATINGS RATIONALE


Moody's definitive rating for this debt obligation confirms the provisional rating assigned on 6 November, 2012. Moody's rating rationale was set out in a press release published on the same day.


In Moody's opinion, the payment obligations represented by the securities available on offer are ranked pari passu with other senior, unsecured debt issuances of the Government of Indonesia and thus justify a rating at an equal level. 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.


Indonesia's rating was upgraded to Baa3 from Ba1 in January 2012 in recognition of the economy's robust growth performance, as well as sustained improvement in Indonesia's fiscal and debt metrics.


Robust domestic demand over the past few years has helped to shield the economy from the global financial crisis and the trade and financial effects arising from sovereign debt stress in the euro area . Real GDP grew by 6.5% in 2011, and we expect economic growth to reach 6.0% this year. This rapid pace of growth looks to be sustainable over the medium-term, aided by a trend acceleration in investment spending and higher FDI inflows.


While government finances have been managed conservatively, the lack of progress on the liberalization of administered prices has led to a higher subsidy bill this year. Nevertheless, overall fiscal balances are projected to be maintained under the deficit ceiling of 3% of GDP for 2012 and 2013 somewhat higher than the average deficit of below 2% of GDP since 2001,. Moreover, the general government debt burden at under 25% of GDP remains on a sustainable trend and is below that of most countries rated at the same level.


The accumulation of foreign exchange reserves has paused on account of cyclical pressures to the balance of payments. However, official reserves continue to be a formidable buffer against cross-border liquidity stress, along with the government's bond stabilization framework and existing contingent lines of financing. At $110.2bn as of end-September 2012, the stock of foreign exchange reserves amounts more than two times residual short-term external debt. We expect reserves to remain over $100bn, significantly above the $60bn peak reached prior to the global financial crisis.


Challenges to the rating include the relatively shallow depth of Indonesia's capital markets, manifested in fairly large non-resident ownership of government securities. As this poses a key vulnerability in the event of substantial capital outflows, the government has put together a crisis management protocol to stabilize the bond market and mitigate any adverse effects on deficit financing. The policy outlook also remains subject to political maneuvering ahead of general elections in 2014.


The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Company — Indonesia
  • Full name
    Republic of Indonesia
  • Registration country
    Indonesia