Fitch Assigns Indonesia's PPSI-III Sukuk 'BBB-(EXP)' Rating

Mon Aug 18, 2014 3:07am EDT

(The following statement was released by the rating agency) HONG KONG, August 18 (Fitch) Fitch Ratings has assigned Indonesia's forthcoming Perusahaan Penerbit SBSN Indonesia III (PPSI-III) global certificates (sukuk) an expected 'BBB-(EXP)' rating. The expected rating on the Islamic bond is in line with the Republic of Indonesia's Long-Term Foreign Currency Issuer Default Rating (IDR) of 'BBB-', which has a Stable Outlook. The sovereign's Long-Term Local Currency IDR is also 'BBB-' with Stable Outlook. The rating reflects Fitch's view that cash flows supporting payment on the sukuk, which will have a combined ijara and wakala structure, will constitute direct, unconditional, unsecured and general obligations of Indonesia, ranking equally with Indonesia's unsecured and unsubordinated marketable external debt. KEY RATING DRIVERS Indonesia's 'BBB-' IDRs reflect the following key rating drivers: - Indonesia's sovereign credit profile benefits from stronger and less volatile economic growth than its peers. - The fiscal deficit has widened but remains under control - helped by adherence to prudent fiscal rules - and contributes to favourable debt levels, which are low compared with peers. - A deterioration of the current account balance over 2011-2013 makes Indonesia vulnerable to international investor sentiment and sudden capital outflows. In the past 12 months, the authorities have managed to mitigate any negative impact on external balances related to the US central bank's unwinding of its quantitative easing program. In particular, Bank Indonesia helped to preserve foreign reserves by allowing the exchange rate to depreciate and raising its policy rates. The current account deficit started to shrink as a percentage of GDP, on a four-quarter rolling basis, from 4Q13. - A structurally weak business environment, including poor infrastructure, weak governance and prevalent corruption, limit potential for development. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well balanced. The main factors that, individually or collectively, might lead to positive rating action are: - Implementation of policies that make the economy more resilient to external pressures and less vulnerable, in case new market pressures arise. - A track record of implementation of reforms and policies to improve the business environment and subsequently raise potential GDP growth, for example, by making it easier to start a business, removal of infrastructure bottlenecks and ensuring minimum wage setting in line with productivity. The main factors that, individually or collectively, might lead to negative rating action are:- - Insufficient policy management of renewed market pressures and a policy stance that would hamper gradual adjustment of the external imbalances. - A sharp and sustained external shock to foreign and/or domestic investors' confidence, leading to a significant weakening of the external finances. At the same time, some strains on the credit profile as a result of external market pressures are not inconsistent with a 'BBB-' rating. KEY ASSUMPTIONS The ratings and outlooks are sensitive to a number of assumptions, including: - Indonesian authorities continue to prioritise economic stability over short-term growth. - The hand-over of power to a new president will continue to proceed in an orderly manner and the country's basic political and social stability is maintained. - The tapering of quantitative easing in the US will be orderly, with no sudden stop of capital flows to emerging economies with substantial current account deficits. Contact: Primary Analyst Thomas Rookmaaker Director +852 2263 9891 Fitch Ratings (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Andrew Colquhoun Senior Director +852 2263 9938 Committee Chairperson Paul Rawkins Senior Director +44 20 3530 1046 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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